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THE PRUDENTIAL INSTITUTIONAL FUND
BALANCED FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (Meeting) of
Balanced Fund (Balanced Fund), a portfolio of The Prudential Institutional Fund,
will be held at 9:00 a.m., eastern time, on September 6, 1996, at Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102-3777, for the following
purposes:
1. To approve an Agreement and Plan of Reorganization and
Liquidation whereby all of the assets of Balanced Fund will be
transferred to the Balanced Portfolio (the Portfolio), a portfolio of
Prudential Allocation Fund, in exchange solely for Class Z shares of the
Portfolio and the Portfolio's assumption of all of the liabilities, if
any, of Balanced Fund; and
2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.
Only holders of shares of beneficial interest in Balanced Fund of record at
the close of business on July 12, 1996, are entitled to notice of and to vote at
this Meeting or any adjournment thereof.
S. JANE ROSE
SECRETARY
Dated: July 31, 1996
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED STAMPED SELF-ADDRESSED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
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PRUDENTIAL ALLOCATION FUND--BALANCED PORTFOLIO
PROSPECTUS
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
AND
THE PRUDENTIAL INSTITUTIONAL FUND--BALANCED FUND
PROXY STATEMENT
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
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The Prudential Institutional Fund (Institutional Fund) is an open-end,
diversified management investment company consisting of seven portfolios, one of
which is Balanced Fund (Balanced Fund). Prudential Allocation Fund (Allocation
Fund) is an open-end, diversified management investment company comprised of two
portfolios, one of which is the Balanced Portfolio (the Portfolio). Both
Institutional Fund and Allocation Fund are managed by indirect, wholly owned
subsidiaries of The Prudential Insurance Company of America. Institutional Fund
is managed by Prudential Institutional Fund Management, Inc. Allocation Fund is
managed by Prudential Mutual Fund Management, Inc. The investment objective of
Balanced Fund is to achieve long-term total return consistent with moderate
portfolio risk. The investment objective of the Portfolio is to achieve a high
total investment return consistent with moderate risk.
This Prospectus and Proxy Statement is being furnished to shareholders of
Balanced Fund in connection with the solicitation of proxies by Institutional
Fund's Board of Trustees for use at a special meeting of Balanced Fund
shareholders to be held on September 6, 1996, at 9:00 a.m., eastern time, and at
any adjournment thereof (Meeting). The primary purpose of the Meeting is to vote
on a proposed Agreement and Plan of Reorganization and Liquidation (Plan),
whereby the Portfolio will acquire all of the assets of Balanced Fund and assume
all of the liabilities, if any, of Balanced Fund. If the Plan is approved by
Balanced Fund's shareholders, and if an order of exemption from certain
provisions of the Investment Company Act of 1940 is received from the Securities
and Exchange Commission (SEC), all such shareholders will be issued Class Z
shares of the Portfolio in exchange for the shares of Balanced Fund held by
them, and Balanced Fund will be terminated. Shareholders of the Portfolio are
not being asked to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
the Portfolio that prospective investors should know before investing.
Additional information contained in a Statement of Additional Information (SAI),
dated July 31, 1996, relating to the Plan and including financial statements has
been filed with the SEC, is incorporated herein by reference and is available
without charge upon request to the address or phone number shown above for
Allocation Fund. This Prospectus and Proxy Statement is accompanied by the
Prospectus of Allocation Fund--Class Z Shares, dated March 1, 1996, as
supplemented on January 5, 1996, March 1, 1996 and July 1, 1996. The Allocation
Fund SAI dated September 29, 1995, as supplemented on September 29, 1995, March
1, 1996 and April 22, 1996, also has been filed with the SEC and is incorporated
by reference herein. A Prospectus for Institutional Fund, dated February 1,
1996, including a May 30, 1996 Supplement thereto, and an SAI for Institutional
Fund dated February 1, 1996, also have been filed with the SEC and are
incorporated by reference herein. The Allocation Fund SAI is available without
charge upon request to Allocation Fund at the address or the toll-free phone
number shown above. The Institutional Fund Prospectus and SAI are available
without charge upon request to Institutional Fund at the address or toll-free
phone number shown above.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is July 31, 1996.
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PRUDENTIAL ALLOCATION FUND--BALANCED PORTFOLIO
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
THE PRUDENTIAL INSTITUTIONAL FUND--BALANCED FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
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PROSPECTUS AND PROXY STATEMENT DATED JULY 31, 1996
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SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation (Plan) and is qualified by reference to the more
complete information contained herein as well as in each of The Prudential
Institutional Fund (Institutional Fund)--Balanced Fund (Balanced Fund)
Prospectus and the enclosed Prudential Allocation Fund (Allocation
Fund)--Balanced Portfolio (the Portfolio) Prospectus. (Balanced Fund and the
Portfolio sometimes are referred to herein individually as a Series and
collectively as the Series). Shareholders should read this entire Prospectus and
Proxy Statement carefully.
GENERAL
This Prospectus and Proxy Statement is furnished by the Board of Trustees of
Institutional Fund in connection with the solicitation of proxies for use at a
Special Meeting of Shareholders of Balanced Fund (Meeting) to be held at 9:00
a.m., eastern time, on September 6, 1996 at Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102-3777, Institutional Fund's principal executive office.
The purpose of the Meeting is to approve or disapprove the Plan, pursuant to
which all of the assets of Balanced Fund will be acquired by, and all of the
liabilities of Balanced Fund, if any, will be assumed by, the Portfolio, and to
transact such other business as may properly come before the Meeting or any
adjournment thereof. The Plan is attached to this Prospectus and Proxy Statement
as Appendix A. The transactions contemplated by the Plan are described herein
and in summary provide that the Portfolio will acquire all of Balanced Fund's
assets in exchange solely for Class Z shares of the Portfolio and the
Portfolio's assumption of all of the liabilities, if any, of Balanced Fund. The
Class Z shares of the Portfolio thereafter will be distributed to the former
shareholders of Balanced Fund, and Balanced Fund will be terminated.
Approval of the Plan requires the affirmative vote of a majority of the
shares of Balanced Fund voted at the Meeting, provided a quorum is present.
Approval of the Plan by the shareholders of the Portfolio is not required, and
the Plan is not being submitted for their approval.
THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of Trustees of Institutional Fund, on behalf of Balanced Fund, and
the Board of Trustees of Allocation Fund, on behalf of the Portfolio, (each, a
Board) have approved the Plan, which provides for the transfer of all of the
assets of Balanced Fund to the Portfolio in exchange solely for Class Z shares
of the
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Portfolio and the assumption by the Portfolio of all of the liabilities, if any,
of Balanced Fund. If the Plan is approved by Balanced Fund shareholders, and if
an order of exemption (Exemptive Order) from certain provisions of the
Investment Company Act of 1940 (Investment Company Act) is received from the
Securities and Exchange Commission (SEC), Class Z shares of the Portfolio will
be distributed to shareholders of Balanced Fund, and Balanced Fund will be
terminated. (All of the foregoing transactions are sometimes referred to herein
as the Reorganization.) It is expected that the Reorganization will become
effective on or about September 20, 1996 (Closing Date). IF THE REORGANIZATION
IS CONSUMMATED, EACH BALANCED FUND SHAREHOLDER WILL RECEIVE THE NUMBER OF FULL
AND FRACTIONAL CLASS Z SHARES OF THE PORTFOLIO (ROUNDED TO THE THIRD DECIMAL
PLACE) HAVING A VALUE EQUAL TO THE VALUE OF SUCH SHAREHOLDER'S SHARES OF
BALANCED FUND AS OF THE CLOSING DATE.
For the reasons set forth below under "--Reasons for the Proposed
Reorganization" and "The Proposed Transaction--Reasons for the Reorganization,"
the Board of Institutional Fund, including those Trustees who are not
"interested persons" (as that term is defined in the Investment Company Act) of
Institutional Fund or Allocation Fund (Independent Trustees), has determined
that the Reorganization is in the best interests of Balanced Fund and that the
interests of the existing shareholders of Balanced Fund will not be diluted as a
result of the Reorganization. The Board of Allocation Fund, including the
Independent Trustees, similarly has determined that the Reorganization is in the
best interests of Allocation Fund and that the interests of existing
shareholders of Allocation Fund will not be diluted as a result of the
Reorganization. ACCORDINGLY, THE BOARD OF INSTITUTIONAL FUND RECOMMENDS APPROVAL
OF THE PLAN.
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Institutional Fund has concluded, based on information
presented by Balanced Fund's manager, Prudential Institutional Fund Management,
Inc. (PIFM), that the Reorganization is in the best interests of Balanced Fund
and its shareholders. The following are among the reasons for the
Reorganization:
- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL) HAS CONSOLIDATED
ITS ASSET MANAGEMENT BUSINESS INTO ONE UNIT, THE MONEY MANAGEMENT GROUP. The
Money Management Group was formed in November 1995 as part of a major corporate
restructuring initiated by Arthur Ryan, Chairman and Chief Executive Officer of
Prudential. All of Prudential's money management businesses are part of this
group, which will develop products and manage assets for all of Prudential's
fee-based, marketable securities businesses, including mutual funds, annuities,
defined contribution and benefit plans, guaranteed products and retirement
administration.
One goal of The Money Management Group is to present one group of mutual
funds to the marketplace, I.E., a "brand" identity. Another goal is to achieve
cost savings. In light of these goals, The Money Management Group undertook a
broad review of the Prudential mutual fund family to see if any changes were
advisable. The consolidation of certain mutual funds that were substantially
similar appeared consistent with attaining the above stated goals, as well as
beneficial to the funds and shareholders involved.
- THE PROPOSED REORGANIZATION IS SUITABLE FOR EACH SERIES BECAUSE A NUMBER
OF SIMILARITIES EXIST BETWEEN THEM. Each is a portfolio of an open-end,
diversified management investment company. Each invests in equity, debt and
money market securities. Both seek to provide investors with a total return
(long-term or high) that is consistent with moderate risk. The investment
adviser for each Series is The Prudential Investment Corporation (PIC), a wholly
owned subsidiary of Prudential.
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Institutional Fund was created in 1992 to attract institutional investors
inclined to invest in mutual funds without sales charges, 12b-1 fees or service
fees, and Balanced Fund commenced operations as a portfolio thereof on November
5, 1992. The Portfolio began offering Class Z shares, which are sold without
sales charges, 12b-1 fees or service fees, on March 1, 1996. Although
prospective purchasers of Class Z shares are limited currently to participants
in the PSI 401(k) Plan, an employee benefit plan sponsored by Prudential
Securities Incorporated (PSI), a wholly owned subsidiary of Prudential, the
Allocation Fund Board has authorized an expanded group of prospective purchasers
of Class Z shares, which includes those who are shareholders of the Balanced
Fund. Certain institutional investors will be able to invest directly in Class Z
shares of the Portfolio and realize the economies of scale available from the
pooling of assets of two similar portfolios.
- AFTER IMPLEMENTATION OF THE PLAN, THE FORMER SHAREHOLDERS OF BALANCED FUND
AND THE SHAREHOLDERS OF THE PORTFOLIO SHOULD BENEFIT FROM REDUCED EXPENSES
RESULTING FROM A COMBINATION OF THE ASSETS OF THE TWO SERIES. The
Reorganization would give the Portfolio the opportunity to increase its assets
by acquiring securities consistent with its investment objective and policies in
exchange for the issuance of its Class Z shares. The Board of Institutional Fund
believes that the Reorganization may achieve certain economies of scale that
Balanced Fund cannot realize alone. The Allocation Fund Board believes that the
Portfolio would realize the benefits of a larger asset base in exchange for its
shares, thereby making it more attractive to retirement plans and other
investors. In addition, the combination of Balanced Fund and the Portfolio would
eliminate certain duplicate expenses, such as Trustees' fees and those incurred
in connection with separate audits and the preparation of separate financial
statements for each Series.
Although each Series currently incurs different expenses, Prudential Mutual
Fund Management, Inc. (PMF) believes that if the proposed Reorganization is
consummated, the ratio of total operating expenses to average daily net assets
of Portfolio Class Z shares will be lower than the ratio currently incurred by
Balanced Fund without considering the effect of a subsidy of Balanced Fund's
operating expenses by PIFM. PIFM has agreed, until September 30, 1996, to bear
any expenses that would cause the ratio of expenses to average daily net assets
of Balanced Fund to exceed 1.00%. This subsidy may be terminated by PIFM at any
time without notice and there can be no assurance that such subsidy will
continue after September 30, 1996. In addition, if the Reorganization is
consummated, PMF has no intention to continue this expense limitation after the
Closing Date.
The ratios for Balanced Fund for the fiscal years ended September 30, 1994
and 1995 were 1.33% and 1.10%, respectively (without subsidy), and were each
1.00% (with subsidy). The expense ratios for Balanced Fund's shares without
subsidy are greater than the anticipated annual expense ratio for the
Portfolio's Class Z shares, which is estimated at .97% based upon expenses
estimated to have been accrued if Class Z shares had been in existence
throughout the fiscal year ended July 31, 1995. See "Fees and Expenses--Expense
Ratios, Fee Waivers and Subsidy" below.
STRUCTURE OF THE SERIES
Both Series are authorized to issue an unlimited number of shares of
beneficial interest. Each Balanced Fund share issued has a PRO RATA interest in
the assets of Balanced Fund and has no interest in the assets of any other
series of Institutional Fund. Balanced Fund bears its own liabilities and its
proportional share of the general liabilities of Institutional Fund and is not
responsible for the liabilities of any other series of Institutional Fund.
Institutional Fund's Board is empowered by Institutional Fund's Declaration of
Trust and By-Laws to establish additional series and classes of shares.
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Shares of the Portfolio are divided into four classes designated Class A,
Class B, Class C and Class Z. 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 is subject to different sales charges and distribution and/or service
fees (except for Class Z shares, which are not subject to any sales charge and
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements and has separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares currently are offered exclusively for sale to participants in the PSI
401(k) Plan. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares and Class Z shares bear no distribution and service
fees, the liquidation proceeds payable to shareholders of those classes are
likely to be lower than to Class A shareholders and to Class Z shareholders. In
accordance with Allocation Fund's and Institutional Fund's Declarations of
Trust, each Board may authorize the creation of additional series, and classes
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Board may determine.
The Boards of Institutional Fund and Allocation Fund may increase or
decrease the number of authorized shares without shareholder approval. Shares of
each Series, when issued, are fully paid, nonassessable, fully transferable and
redeemable at the option of the holder. Shares also are redeemable at the option
of each Series under certain circumstances. Each share of each class of the
Portfolio is equal as to earnings, assets and voting privileges, except as noted
above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares of Allocation Fund (which convert to Class A shares after
approximately seven years), there are no conversion, preemptive or other
subscription rights. In the event of liquidation of either Series, each share
thereof is entitled to its portion of that Series's assets after all of its
debts and expenses have been paid. Neither Series's shares have cumulative
voting rights for the election of Trustees.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Portfolio is a high total investment return
consistent with moderate risk. The Portfolio seeks to achieve this objective by
investing in a diversified portfolio of money market instruments, debt
obligations and equity securities (including securities convertible into equity
securities). The specific asset mix of the Portfolio is determined by Allocation
Fund's investment adviser, and at least 25% of the value of the Portfolio's
assets must be invested in fixed-income senior securities. There can be no
assurance that this objective will be achieved. Debt obligations in which the
Portfolio may invest will be rated primarily Baa/BBB or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Services (S&P), a
division of the McGraw Hill Companies, respectively (or a similar nationally
recognized rating service). Up to 10% of the Portfolio's total assets may be
invested in fixed-income securities rated Ba or lower by Moody's or BB or lower
by S&P (or a similar nationally recognized rating service) or in non-rated
fixed-income securities of comparable quality. See "Principal Risk Factors--High
Yield Securities" below. Equity securities in which the Portfolio will primarily
invest are common stocks of major, established corporations that, in the opinion
of the investment adviser, have prospects of price appreciation greater than
that of the Standard & Poor's Composite 500 Stock Price Index. The Portfolio
also may invest in preferred stocks or debt securities that either have warrants
attached or are otherwise convertible into such common stocks. In addition, the
Portfolio may invest in common stocks and common stock equivalents of smaller,
faster growing companies. The Portfolio also may invest up to 30% of its assets
in foreign securities, may
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make short sales against-the-box and may engage in various hedging and income
enhancement strategies, including the purchase and sale of derivatives. These
strategies include the purchase and sale of call options, the purchase of put
options and related short-term trading. See "Principal Risk Factors--Hedging and
Return Enhancement Activities" below. The Portfolio may hold up to 10% of its
net assets in illiquid securities.
Balanced Fund's investment objective is to realize long-term total return
consistent with moderate portfolio risk. To achieve its objective, Balanced Fund
allocates at least 65% of its total assets among (i) common stocks, preferred
stocks and other equity-related securities (including American Depositary
Receipts (ADRs)); (ii) investment grade fixed-income securities with a weighted
average maturity of 10 years or less; and (iii) high quality money market
instruments and other short-term investment grade debt securities. Balanced
Fund's investment adviser (PIC) uses the following ranges as the normal
operating parameters for each type of security to be purchased for Balanced
Fund: (i) 25-50% of Balanced Fund's total assets will be invested in common
stocks, preferred stocks and other equity-related securities (including ADRs);
(ii) 30-60% of Balanced Fund's assets will be invested in investment grade
fixed-income securities with a weighted average maturity of 10 years or less;
and (iii) 0-45% of Balanced Fund's total assets will be invested in money market
instruments. At least 25% of Balanced Fund's total assets will be invested in
fixed-income senior securities. Up to 35% of Balanced Fund's total assets may be
invested in foreign securities. Up to 5% of Balanced Fund's net assets may be
invested in fixed-income securities rated below investment grade (I.E., lower
than BBB/Baa by S&P or Moody's or an equivalent rating by another nationally
recognized rating service) or in non-rated fixed-income securities of comparable
quality. See "Principal Risk Factors--High Yield Securities" below. While the
majority of Balanced Fund's equity-related holdings are expected to be in
larger, well-established companies, Balanced Fund also may invest in the equity
securities of smaller companies. In order to invest uncommitted cash balances,
to maintain liquidity to meet redemptions or for hedging or incidental return
enhancement purposes, Balanced Fund may: (i) purchase and sell put and call
options on securities, stock indices and interest rate indices; (ii) purchase
and sell futures contracts on securities, stock indices and interest rate
indices; and (iii) enter into interest rate swap transactions. See "Principal
Risk Factors--Hedging and Return Enhancement Activities" below. Balanced Fund
also may: (i) enter into repurchase agreements, when-issued, delayed delivery
and forward commitment transactions; and (ii) lend its portfolio securities.
With respect to the equity component of Balanced Fund's total assets, it also
may: (i) purchase and sell currency spot contracts; (ii) purchase and sell
currency futures contracts and currency forward contracts; and (iii) purchase
and sell put and call options on currencies and on foreign currency futures
contracts in each case to attempt to reduce risks associated with currency
fluctuations.
CERTAIN DIFFERENCES BETWEEN THE SERIES
While both Series are similar in many respects, a number of differences
between them exist as well.
First, although the Series's investment objectives are substantially
similar, Balanced Fund seeks long-term total return, while the Portfolio seeks
high total return.
Second, their managers and their management fees are different. PIFM, whose
principal business address is 30 Scranton Office Park, Moosic, Pennsylvania
18507-1789, is the manager of Balanced Fund. PIFM was incorporated in May 1992
under the laws of the Commonwealth of Pennsylvania and is an indirect,
wholly-owned subsidiary of Prudential. Balanced Fund pays PIFM a management fee
at an annual rate of .70 of 1% of Balanced Fund's average daily net assets. PMF,
whose principal business address is One Seaport Plaza, New York, New York
10292-1025, is the manager of the Portfolio. PMF was incorporated in May 1987
under the laws of the State of Delaware and also is an indirect, wholly owned
subsidiary of
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Prudential. As of June 30, 1996, PMF served as manager or administrator to 60
investment companies, with aggregate assets of approximately $52 billion. If the
Reorganization is consummated, Balanced Fund's assets will be transferred to the
Portfolio and will be managed by PMF. The Portfolio pays PMF a management fee at
the annual rate of .65 of 1% of the Portfolio's average daily net assets.
Third, while each Series allocates its assets among equity securities, debt
obligations and money markets instruments, the types of debt securities that may
be held in the two Series's portfolios are different. Balanced Fund may invest
no more than 5% of its net assets in debt securities that are non-investment
grade, and the investment grade fixed-income securities in which Balanced Fund
primarily may invest have a weighted average maturity of ten years or less. The
Portfolio may invest up to 10% of its total assets in non-investment grade debt
securities, and the average weighted maturity of the fixed-income securities in
which the Portfolio primarily may invest will exceed the average duration of
those securities, which will be less than ten years. Non-investment grade
fixed-income securities, I.E., those rated below BBB or Baa by S&P or Moody's,
respectively, or a similar nationally recognized rating service, or non-rated
fixed-income securities of comparable quality, are also known as "junk bonds."
Securities rated BBB by S&P or Baa by Moody's have speculative characteristics,
and changes in economic conditions or other circumstances could lead to a
weakened capacity to make principal and interest payments. Securities rated BB
or lower by S&P or Ba or lower by Moody's generally are considered to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. See "Principal Risk Factors--High Yield Securities" below.
The Portfolio's ability to invest in securities with a longer average weighted
maturity may result in greater volatility than if it invested in securities with
an average weighted maturity of ten years or less.
Fourth, Balanced Fund may invest up to 35% of its assets in foreign
securities, while the Portfolio may invest no more than 30% of its assets in
foreign securities. Investment in foreign securities involves certain
considerations and risks that typically are not associated with investing in
U.S. Government securities and securities of domestic companies. See "Principal
Risk Factors--Foreign Investments" below.
Finally, although PIC is the investment adviser of both Series, the
investment style of the respective portfolio managers of each Series is
different. Prudential Diversified Investment Strategies (PDI Strategies), a unit
of PIC, is responsible for the asset allocation and overall management of
Balanced Fund. PDI Strategies employs a team approach to the management of
Balanced Fund. Roger E. Ford, a Managing Director at PIC, has responsibility for
the day-to-day management of the equity portion of Balanced Fund's portfolio.
Mr. Ford is a value investor who uses cash flow generation to measure a
company's value, but also considers price to book value, price to earnings and
price to private market value. Kay T. Willcox, Managing Director and Senior
Portfolio Manager of Prudential Global Advisers, a unit of PIC, has
responsibility for the day-to-day portfolio management of the bond portion of
Balanced Fund's portfolio.
Gregory Goldberg determines the asset allocation for the Portfolio and
manages its equity and bond holdings. Mr. Goldberg is a growth-oriented equity
investor who utilizes bottom-up analysis, selecting stocks based on their
potential to deliver above average growth in revenues and earnings. On the fixed
income side, Mr. Goldberg seeks investments that compare favorably in yield
curve analysis and historical spreads to Treasury equivalents.
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the manager of Balanced Fund, is compensated
pursuant to a management agreement with Institutional Fund, at an annual rate of
.70 of 1% of Balanced Fund's average daily net assets. PMF, the manager of
Allocation Fund, is compensated pursuant to a management agreement with
Allocation Fund, at an annual rate of .65 of 1% of the Portfolio's average daily
net assets. For the fiscal year
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ended September 30, 1995, Balanced Fund paid PIFM management fees at an annual
rate of .70 of 1% of its average daily net assets. For the fiscal year ended
July 31, 1995, and the six-month period ended January 31, 1996, the Portfolio
paid PMF management fees at an annual rate of .65 of 1% of its average daily net
assets.
Under a subadvisory agreement between PIFM and PIC, PIC provides investment
subadvisory services for the management of Balanced Fund. Under a subadvisory
agreement between PMF and PIC, PIC provides investment subadvisory services for
the management of the Portfolio. Each subadvisory agreement provides that PIFM
or PMF, as applicable, will reimburse PIC for its reasonable costs and expenses
in providing investment subadvisory services. PIFM and PMF continue to have
responsibility for all investment advisory services pursuant to their respective
management agreements and supervise PIC's performance of its services.
DISTRIBUTION FEES. Prudential Retirement Services, Inc. (PRSI), 751 Broad
Street, Newark, New Jersey 07102, an affiliate of PIFM and a corporation
organized under the laws of the State of New Jersey, serves as the distributor
of Balanced Fund's shares. No distribution or service fees are paid to PRSI by
Balanced Fund.
PSI, One Seaport Plaza, New York, New York 10292, serves as the distributor
of Class Z shares of the Portfolio. PSI is a corporation organized under the
laws of the State of Delaware. No distribution or service fees are paid to PSI
by the Portfolio's Class Z shares.
ADMINISTRATION FEES. Institutional Fund has entered into an administration,
transfer agency and service agreement (Administration Agreement) with PMF, which
provides that PMF will furnish to Balanced Fund such services as Balanced Fund
may require in connection with administration of its business affairs. Under the
Administration Agreement, Institutional Fund pays PMF a monthly fee at an annual
rate of .17% of the average daily net assets of Institutional Fund up to $250
million and .15% of Institutional Fund's average daily net assets in excess of
$250 million. PMF also provides Balanced Fund with transfer agent and dividend
disbursing services for no additional fee through its wholly owned subsidiary,
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837.
The Portfolio incurs no separate fee for administrative services, but does
use PMFS to furnish transfer agent and dividend disbursing services. The
Portfolio, pursuant to a Transfer Agency and Service Agreement, pays PMFS an
annual fee per shareholder account of $9.50, a new account set-up fee for each
manually established account of $2.00 and a monthly inactive zero balance
account fee per shareholder account of $0.20. PMFS also is reimbursed for its
out-of-pocket expenses, including postage, stationery, printing, allocable
communications expenses and other costs. (During the fiscal year ended July 31,
1995, these fees and expenses represented an annual rate of approximately .2% of
the Portfolio's average daily net assets.) Existing shareholders of Balanced
Fund will not be subject to the $2.00 manual establishment fee with respect to
any account established in connection with the Reorganization.
OTHER EXPENSES. Each Series also pays certain other expenses in connection
with its operation, including accounting, custodian, reports to shareholders,
legal, audit and share registration expenses. Although the basis for calculating
these fees and expenses is the same for Balanced Fund and the Portfolio, the per
share effect on shareholder returns is affected by their relative size.
Combining the Series will eliminate duplication of certain expenses. For
example, only one annual audit of the combined Series will be required rather
than separate audits of each Series as currently required.
8
<PAGE>
EXPENSE RATIOS, FEE WAIVERS AND SUBSIDY. PIFM and PMF each may from time to
time waive all or a portion of its management fee and subsidize all or a portion
of the operating expenses of Balanced Fund and the Portfolio, respectively. Fee
waivers and expense subsidies may increase a Series' yield and total return. Any
fee waiver or subsidy may be terminated at any time without notice, after which
a Series's expenses may increase and its yield and total return may be reduced.
It is not anticipated that the Portfolio's expenses will be subject to any fee
waiver or subsidy in the near future.
For the fiscal year ended September 30, 1995, total expenses stated as a
percentage of average net assets of Balanced Fund were 1.10% before reduction of
expenses by PIFM and 1.00% after reduction of expenses. For the six-month period
ended March 31, 1996, Balanced Fund's total expenses as a percentage of average
net assets would have been 1.00% (annualized). PIFM has agreed, until September
30, 1996, to bear any expenses that would cause the ratio of expenses payable by
Balanced Fund to exceed 1.00%. Expenses paid or assumed by PIFM are subject to
recoupment by PIFM in later years, provided that (a) no recoupment will be made,
in any year, if it would result in Balanced Fund's expense ratio exceeding
1.00%, (b) no recoupment will be made after December 31, 1996, and (c) no
recoupment will be made after the Closing Date, if the Reorganization is
consummated.
The Portfolio commenced offering Class Z shares on March 1, 1996. For the
fiscal year ended July 31, 1995 and the six-month period ended January 31, 1996,
total expenses stated as a percentage of average net assets of the Class A
shares of the Portfolio were 1.22% and 1.19% (annualized), respectively; these
amounts include an annual distribution and service fee of .25% of the average
daily net assets of the Class A shares, a fee that is not paid by the Class Z
shares.
Each Series's shareholder transaction expenses are shown below. Note that
Balanced Fund and the Portfolio's Class Z shareholder transaction expenses are
the same. THERE WILL NOT BE ANY SHAREHOLDER TRANSACTION FEE PAYABLE IN
CONNECTION WITH THE REORGANIZATION.
<TABLE>
<CAPTION>
PORTFOLIO
BALANCED FUND CLASS Z SHARES
--------------- ---------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load imposed on Purchases (as a percentage of offering price)..... None None
Maximum Sales Load or Deferred Sales Load imposed on Reinvested Dividends....... None None
Deferred Sales Load (as a percentage of original purchase price or redemption
proceeds, whichever is lower).................................................. None None
Redemption Fees................................................................. None None
Exchange Fee.................................................................... None None
</TABLE>
Set forth below is a comparison of the Series's operating expenses that, in
the case of Balanced Fund, are for the fiscal year ended September 30, 1995, and
in the case of the Portfolio's Class Z shares, are estimated for the fiscal year
ended July 31, 1995. The ratios also are shown on a pro forma (estimated)
9
<PAGE>
combined basis, giving effect to the Reorganization. Following the
Reorganization, the actual expense ratios of the Portfolio Class Z shares are
expected to be more favorable than those for the fiscal year ended July 31, 1995
and the six-month period ended January 31, 1996.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE BALANCED PORTFOLIO-- PRO FORMA
NET ASSETS) FUND CLASS Z+ COMBINED
- ------------------------------ -------- ------------- ---------
<S> <C> <C> <C>
Management Fees............... .700% .650% .650%
Administration Fee............ .134 None None
12b-1 Fees.................... None None None
Other Expenses (Before
Reduction)................... .262 .323 .305
-------- ----- ---------
Total Fund Operating Expenses
(Before Reduction)........... 1.096% .973% .955%
-------- ----- ---------
-------- ----- ---------
Total Fund Operating Expenses
(After Reduction)............ 1.000%++
--------
--------
<FN>
- ------------------
+ The Portfolio commenced offering Class Z shares on March 1, 1996. The ratios
for Class Z shares are based upon estimates of expenses expected to have been
incurred if Class Z shares had been in existence throughout the fiscal year
ended July 31, 1995.
++ In the interest of limiting expenses of Balanced Fund, PIFM has agreed, until
September 30, 1996, to bear any expenses that would cause the ratio of
expenses payable by Balanced Fund to exceed 1.00%. If the Reorganization is
consummated, PMF will not continue this expense limitation after the Closing
Date. Expenses paid or assumed by PIFM are subject to recoupment by PIFM in
later years, provided that (a) no recoupment will be made, in any year, if it
would result in Balanced Fund's expense ratio exceeding 1.00%, (b) no
recoupment will be made after December 31, 1996, and (c) no recoupment will
be made after the Closing Date, if the Reorganization is consummated.
</TABLE>
Set forth below is an example that shows the expenses that an investor in
the combined Series would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period............................................................ $ 10 $ 30 $ 53 $ 117
</TABLE>
THE EXAMPLE 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 an investor in understanding the various types of
costs and expenses that an investor in the combined Series will bear, whether
directly or indirectly.
PURCHASES AND REDEMPTIONS
Balanced Fund shares are offered exclusively to retirement programs and
arrangements (Programs) through their plan sponsors, to individual retirement
accounts (IRAs) and to certain institutional investors. Sponsors of a Program or
their agents are referred to as "Program Sponsor(s)," individual employees
participating in a Program are referred to as "Participant(s)," and individual
investors who separate from a Program are referred to as "Continuing
Participant(s)." Endowments, foundations, insurance companies and other
institutional investors are referred to as "Other Institutional Investors." The
term "shareholders" with respect to Balanced Fund refers to each or all of these
categories as well as to IRAs, as appropriate.
Shares of Balanced Fund may be purchased through a Program Sponsor's
recordkeeper or directly from PMFS. There is no minimum initial investment
requirement, and there are no sales charges associated with the purchase or
redemption of Balanced Fund shares. The purchase price for Balanced Fund shares
is the net asset value per share next determined following acceptance of a
purchase order by the Program Sponsor's recordkeeper or PMFS.
10
<PAGE>
Class Z shares of the Portfolio currently are offered exclusively to
Participants in PSI's 401(k) Plan. On or before the Closing Date, Class Z shares
will be made available through PSI, Pruco Securities Corporation (Prusec), an
affiliated broker/dealer, or directly from PMFS, at the net asset value per
share next determined after receipt of a purchase order by PMFS or PSI. Class Z
shares will be available for purchase by (i) pension, profit sharing or other
employee benefit plans qualified under section 401 of the Internal Revenue Code
of 1986, as amended (Internal Revenue Code), deferred compensation and annuity
plans under sections 457 and 403(b)(7) of the Internal Revenue Code, and
non-qualified plans for which the Portfolio is an available option (Benefit
Plans), provided such plans (in combination with other plans sponsored by the
same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants (other than Benefit Plans and
IRAs) in any fee-based program sponsored by PSI that includes mutual funds as
investment options and for which the Portfolio is an available option; and (iii)
investors who are, or have executed a letter of intent to become, shareholders
of any series of Institutional Fund on or before the Closing Date or who on that
date have investments in certain products for which Institutional Fund provides
exchangeability. After a Benefit Plan qualifies to purchase Class Z shares, all
subsequent purchases will be for Class Z shares. There are no sales charges
associated with the purchase or redemption of the Portfolio's Class Z shares.
Shares of each Series may be redeemed at any time at the net asset value
next determined after the Program Sponsor's recordkeeper in the case of Balanced
Fund, or PSI or PMFS in the case of the Portfolio, receives the redemption
request in proper form. No sales charges will be imposed in connection with the
Reorganization.
EXCHANGE PRIVILEGES
Shareholders of Balanced Fund have an exchange privilege with other
available funds (depending upon the provisions of the Program) by request
through the Program's recordkeeper at the net asset value next determined after
receipt by PMFS or the Program Sponsor's recordkeeper of an exchange request in
good order. Exchanges of Balanced Fund shares currently are permitted at no
charge, subject to any minimum investment requirements or any general
limitations of the fund into which an exchange is sought. Currently, there are
no such requirements or limitations.
Class Z shareholders of the Portfolio have an exchange privilege with Class
Z shares of certain other mutual funds for which PMF serves as manager or
administrator (Prudential Mutual Funds), including one or more specified money
market funds, subject to the minimum investment requirements of such funds.
Class Z shares of the Portfolio may be exchanged for Class Z shares of another
Prudential Mutual Fund on the basis of relative net asset value. No sales charge
will be imposed at the time of the exchange.
An exchange of shares of either Series for shares of another Prudential
Mutual Fund is treated as a redemption of Series shares and purchase of the
other fund's shares for tax purposes. Each Series's exchange privilege may be
modified or terminated at any time on sixty days' notice.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio pays dividends from net investment income, if any, quarterly
and makes distributions at least annually of any net capital gains. Balanced
Fund pays dividends from net investment income and makes distributions of net
capital gains, if any, at least annually. A shareholder of the Portfolio, unlike
Balanced Fund shareholders, may receive dividends and other distributions in
cash or in additional shares of the Portfolio. Shareholders of Balanced Fund
receive dividends and other distributions in additional shares of
11
<PAGE>
the Balanced Fund. A Balanced Fund shareholder will receive dividends and other
distributions in additional shares of the Portfolio with respect to the
Portfolio shares he or she receives pursuant to the Reorganization.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED REORGANIZATION
Institutional Fund and Allocation Fund have received an opinion of
Kirkpatrick & Lockhart LLP to the effect that the proposed Reorganization will
constitute a tax-free reorganization within the meaning of section 368(a)(1)(C)
of the Internal Revenue Code. Accordingly, no gain or loss will be recognized to
either Series on the transfer to the Portfolio of all of Balanced Fund's assets
and the assumption of all of its liabilities, if any, or to shareholders of
Balanced Fund on their receipt of Class Z shares of the Portfolio. The tax basis
for such shares to be received by a Balanced Fund shareholder will be the same
as the shareholder's tax basis for the shares of Balanced Fund to be
constructively surrendered in exchange therefor. In addition, the holding period
of the Portfolio shares to be received by a shareholder pursuant to the
Reorganization will include the period during which the shares of Balanced Fund
to be constructively surrendered in exchange therefor were held, provided the
latter shares were held as capital assets by the shareholder on the date of the
Reorganization. See "The Proposed Transaction--Federal Income Tax
Considerations" below.
PRINCIPAL RISK FACTORS
Because the Series's investment objectives and policies are substantially
similar and because the Series are managed by the same investment subadviser,
the Series will be subject to similar investment risks. For a more complete
discussion of the risks attendant to an investment in the Portfolio, please see
pages 9 through 18 of the Allocation Fund Prospectus, which accompanies this
Prospectus and Proxy Statement and is incorporated herein by reference.
HIGH YIELD SECURITIES
The Portfolio may invest up to 10% of its total assets in fixed-income
securities rated Ba or lower by Moody's or BB or lower by S&P (or a similar
nationally recognized rating service) or in non-rated fixed-income securities of
comparable quality. Subsequent to its purchase by the Portfolio, a fixed-income
obligation may be assigned a lower rating or cease to be rated. Such an event
would not require the elimination of the issue from the investment portfolio,
but the investment adviser will consider such an event in determining whether
the Portfolio should continue to hold the security in its portfolio. The
Portfolio also may invest in unrated fixed-income securities which, in the
opinion of its investment adviser, are of a quality comparable to rated
securities in which the Portfolio may invest. For a description of security
ratings, see Appendix A to Allocation Fund's Prospectus.
The Balanced Fund may invest up to 5% of its net assets in fixed-income
securities rated lower than Baa by Moody's or BBB by S&P, or comparable ratings
of similar nationally recognized rating agencies, or in non-rated fixed-income
securities which, in the opinion of the Fund's investment adviser, are of
comparable quality.
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 also
may 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
12
<PAGE>
interest rates. Securities rated BB or lower by S&P or Ba or lower by Moody's,
commonly known as "junk bonds," generally are considered to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal.
FOREIGN INVESTMENTS
The Portfolio may invest up to 30% of its assets in securities of foreign
companies and countries. Balanced Fund may invest up to 35% of its assets in
securities of foreign companies and countries. Foreign securities involve
additional risks and considerations not typically associated with investing in
U.S. Government securities and securities of domestic issuers. Investments in
obligations of foreign issuers may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions. In addition, there may be less
publicly available information about foreign issuers than about domestic issuers
and foreign issuers generally are not subject to the same accounting, auditing
and financial recordkeeping standards and requirements as domestic issuers.
Investment in foreign securities also involves currency risk, I.E., the risk
that shifts in foreign exchange rates may lessen the dollar value of
international investments. In the event of a default with respect to any foreign
debt obligations, it may be more difficult for the Portfolio to obtain or
enforce a judgment against the issuer of such securities.
HEDGING AND RETURN ENHANCEMENT ACTIVITIES
The Portfolio also may engage in various portfolio strategies, including the
purchase and sale of derivatives, to reduce certain risks of its investments and
to attempt to enhance income. These strategies include (1) the purchase and
writing (I.E., sale) of put and call options on stocks and currencies, (2) the
purchase and sale of futures contracts on interest-bearing securities, interest
rate and financial indices and the purchase and sale of options thereon and (3)
entering into forward foreign currency exchange contracts.
Balanced Fund also may engage in various portfolio strategies, including the
purchase and sale of derivatives. These strategies include the purchase and
writing (I.E., sale) of put and call options on stocks, stock indices and
interest rate indices and the purchase and sale of futures contracts on
securities, stock indices and interest rate indices. The Balanced Fund also may
enter into interest rate swap transactions and, in an effort to attempt to
reduce risks of currency fluctuations, may purchase and sell currency spot
contracts, purchase and sell currency futures contracts and currency forward
contracts and purchase and sell put and call options on currencies and on
foreign currency futures contracts.
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the
Portfolio would not be subject absent the use of these strategies. If the
investment adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Portfolio may leave the Portfolio in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency and futures contracts and options on futures contracts
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation, or even no correlation, between the price of
options and futures contracts and options thereon and movements in the prices of
the assets being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and (6) the possible inability
13
<PAGE>
of the Portfolio to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the
Portfolio to sell a portfolio security at a disadvantageous time, due to the
need for the Portfolio to maintain "cover" or to segregate securities in
connection with hedging transactions.
REALIGNMENT OF INVESTMENT PORTFOLIO
The portfolio manager of the Portfolio anticipates selling certain
securities in the investment portfolio of the combined Fund following the
consummation of the transaction. The portfolio manager of the Portfolio expects
that the sale of 50% or more of the assets acquired from the Balanced Fund and
the purchase of other securities may affect the aggregate amount of taxable
gains and losses recognized by the Portfolio, as well as increase the amount of
brokerage commissions paid by the Portfolio. Thus, the Reorganization may
subject Balanced Fund shareholders to expenses to which they would not have been
subject had the Reorganization not occurred.
SPECIAL MEETING OF ALLOCATION FUND SHAREHOLDERS
It is anticipated that a special meeting of Allocation Fund shareholders
will be held in October 1996. It is intended that at such meeting Allocation
Fund shareholders will consider: (i) electing Allocation Fund's Board
(information on the nominated slate of Trustees for Allocation Fund is attached
hereto as Appendix D) and (ii) ratifying the Board's selection of Deloitte &
Touche LLP as Allocation Fund's independent public accountants.
Approval of these proposals by the shareholders of Allocation Fund is not a
condition to completion of the Reorganization. Only Allocation Fund shareholders
of record on August 9, 1996, will be entitled to vote on the above proposals.
There can be no assurance that either or both of these proposals will be
approved by the shareholders of Allocation Fund.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan, a copy of which is attached as Appendix A to this Prospectus and Proxy
Statement.
The Plan contemplates (i) the Portfolio acquiring all of the assets of
Balanced Fund in exchange solely for Class Z shares of the Portfolio and the
assumption by the Portfolio of all of Balanced Fund's liabilities, if any, as of
the Closing Date, (ii) the constructive distribution on the Closing Date of such
Class Z shares to the shareholders of Balanced Fund and (iii) the termination of
Balanced Fund.
The assets of Balanced Fund to be acquired by the Portfolio shall include,
without limitation, all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by Balanced Fund and any deferred or prepaid expenses shown as assets on
the books of Balanced Fund on the Closing Date. The Portfolio will assume from
Balanced Fund all debts, liabilities, obligations and duties of Balanced Fund of
whatever kind or nature; provided, however, that Balanced Fund will utilize its
best efforts, to the extent practicable, to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date. The Portfolio
will deliver to Balanced Fund Class Z shares of the Portfolio, which Balanced
Fund will then distribute to its shareholders.
14
<PAGE>
The value of Balanced Fund's assets to be acquired and the amount of its
liabilities to be assumed by the Portfolio and the net asset value of a Class Z
share of the Portfolio will be determined as of 4:15 p.m., New York time, on the
Closing Date in accordance with the valuation procedures specified in the
respective Fund's then-current Prospectus and Statement of Additional
Information. Securities and other assets and liabilities for which market
quotations are not readily available will be valued at fair value as determined
in good faith under procedures established by Institutional Fund's and
Allocation Fund's respective Boards.
As soon as practicable after the Closing Date, Balanced Fund will distribute
PRO RATA to its shareholders of record, determined as of the close of business
on the Closing Date, the Class Z shares of the Portfolio received by Balanced
Fund in exchange for such shareholders' shares of Balanced Fund. Such
distribution will be accomplished by opening accounts on the books of the
Portfolio in the names of Balanced Fund shareholders and by transferring thereto
Class Z shares of the Portfolio previously credited to the account of Balanced
Fund on those books. Each shareholder account shall be credited with the
respective PRO RATA number of the Portfolio Class Z shares due to the
shareholder in whose name the account is established. Fractional shares of the
Portfolio will be rounded to the third decimal place.
Accordingly, every shareholder of Balanced Fund will own Class Z shares of
the Portfolio immediately after the Reorganization that, except for rounding,
will have a total value equal to the value of that shareholder's shares of
Balanced Fund immediately prior to the Reorganization. Moreover, because Class Z
shares of the Portfolio will be issued at net asset value in exchange for net
assets of Balanced Fund that, except for rounding, will have a value equal to
the aggregate value of those shares, the net asset value per Class Z share of
the Portfolio will be unchanged. Thus, the Reorganization will not result in a
dilution of the value of any shareholder account. However, as a result of the
Reorganization, the percentage of ownership interest of each former Balanced
Fund shareholder in the combined Series will be less than such shareholder's
current percentage of ownership in Balanced Fund because, while the shareholder
will have the same dollar amount invested initially in the Portfolio that it had
invested in Balanced Fund, its investment will represent a smaller percentage of
the combined net assets of the two Series.
Any transfer taxes payable upon issuance of shares of the Portfolio in a
name other than that of the registered holder of the shares on the books of
Balanced Fund as of the time of transfer shall be paid by the person to whom
such shares are to be issued as a condition of such transfer. Any reporting
responsibility of Balanced Fund will continue to be its responsibility up to and
including the Closing Date and such later date on which it is terminated.
The consummation of the Reorganization is subject to a number of conditions
set forth in the Plan, some of which may be waived by either Board. Consummation
of the Reorganization also is conditioned upon the SEC's issuance of the
Exemptive Order. The Plan may be terminated and the Reorganization abandoned at
any time prior to the Closing Date, before or after approval by the shareholders
of Balanced Fund. In addition, the Plan may be amended in any mutually agreeable
manner, except that subsequent to the Meeting no amendment may be made that
would detrimentally affect the value of the Portfolio shares to be distributed.
REASONS FOR THE REORGANIZATION
The Board of Institutional Fund, including a majority of its Independent
Trustees, has determined that the interests of Balanced Fund shareholders will
not be diluted as a result of the proposed Reorganization and that the proposed
Reorganization is in the best interests of Balanced Fund. In addition, the Board
of
15
<PAGE>
Allocation Fund, including a majority of its Independent Trustees, has
determined that the interests of Allocation Fund shareholders will not be
diluted as a result of the proposed Reorganization and that the proposed
Reorganization is in the best interests of Allocation Fund.
The reasons for the proposed Reorganization are summarized above under
"Synopsis--Reasons for the Proposed Reorganization." The Boards of Institutional
Fund and Allocation Fund based their decision to approve the Plan on an inquiry
into a number of factors, including the following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Series;
(2) the relative past and current growth in assets and investment
performance and future prospects of each Series;
(3) the anticipated effect of the Reorganization on the expense ratios
of each Series;
(4) the costs of the Reorganization, which will be paid for by each
Series in proportion to its respective net asset level;
(5) the tax-free nature of the Reorganization to each Series and its
shareholders; and
(6) the potential benefits to the shareholders of each Series.
If the Plan is not approved by Balanced Fund shareholders, the Institutional
Fund Board may consider other appropriate action, such as the liquidation of
Balanced Fund or a merger or other business combination with an investment
company other than the Portfolio.
DESCRIPTION OF SECURITIES TO BE ISSUED
Class Z shares of the Portfolio will be issued to Balanced Fund shareholders
on the Closing Date. The Portfolio is authorized to issue an unlimited number of
Class Z shares of beneficial interest, $.01 par value per share. Each Class Z
share represents an equal and proportionate interest in the Portfolio with each
other share of the same class. Shares entitle their holders to one vote per full
share and fractional votes for fractional shares held. For further discussion of
the Portfolio Class Z shares, see "Synopsis--Structure of the Series" above.
FEDERAL INCOME TAX CONSIDERATIONS
Institutional Fund and Allocation Fund have received an opinion from
Kirkpatrick & Lockhart LLP, Institutional Fund's counsel, substantially to the
effect that (1) the Reorganization will constitute a reorganization within the
meaning of section 368(a)(1)(C) of the Internal Revenue Code, and each Series
will be a "party to a reorganization" within the meaning of section 368(b) of
the Internal Revenue Code; (2) a Balanced Fund shareholder will recognize no
gain or loss on the constructive exchange of all its Balanced Fund shares solely
for Class Z shares of the Portfolio in complete liquidation of Balanced Fund
(Internal Revenue Code section 354(a)(1)); (3) no gain or loss will be
recognized to Balanced Fund on the transfer of its assets to the Portfolio in
exchange solely for Class Z shares of the Portfolio and the assumption by the
Portfolio of Balanced Fund's liabilities, if any, and the subsequent
distribution of those shares to Balanced Fund's shareholders in complete
liquidation thereof (Internal Revenue Code sections 361(a) and 357(a)); (4) no
gain or loss will be recognized to the Portfolio on the acquisition of such
assets in exchange solely for the Portfolio's Class Z shares and its assumption
of Balanced Fund's liabilities, if any (Internal Revenue Code section 1032(a));
(5) the Portfolio's basis for the assets to be received pursuant to the
Reorganization will be the same as the basis thereof in Balanced Fund's hands
immediately before the Reorganization, and the Portfolio's holding period for
those assets will include Balanced Fund's holding period therefor (Internal
16
<PAGE>
Revenue Code sections 362(b) and 1223(2)); (6) a Balanced Fund shareholder's
basis for the Class Z shares of the Portfolio to be received by it pursuant to
the Reorganization will be the same as its basis for the shares of Balanced Fund
to be constructively surrendered in exchange therefor (Internal Revenue Code
section 358(a)(1)); and (7) the holding period of the Class Z shares of the
Portfolio to be received by a shareholder of Balanced Fund pursuant to the
Reorganization will include the period during which the shares of Balanced Fund
to be constructively surrendered in exchange therefor were held, provided the
latter shares were held as capital assets by the shareholder on the date of the
exchange (Internal Revenue Code section 1223(1)).
Shareholders of Balanced Fund should consult their tax advisers regarding
the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
CERTAIN COMPARATIVE INFORMATION ABOUT ALLOCATION FUND AND INSTITUTIONAL FUND
ORGANIZATION. Allocation Fund is a Massachusetts business trust, and the
rights of its shareholders are governed by its Declaration of Trust, its By-Laws
and applicable Massachusetts law. Institutional Fund is a Delaware business
trust, and the rights of its shareholders are governed by its Declaration of
Trust, its By-Laws and applicable Delaware law.
CAPITALIZATION. Allocation Fund is authorized to issue an unlimited number
of shares of beneficial interest, par value $.01 per share, and contains two
portfolios, one of which is the Portfolio. The Portfolio's shares currently are
divided into four classes, designated Class A, Class B, Class C and Class Z.
Institutional Fund's Declaration of Trust authorizes the Board to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$.001 per share. Balanced Fund offers one class of shares.
In addition, the Board of Institutional Fund and Allocation Fund may
reclassify unissued shares to authorize additional classes and series of shares
having terms and rights determined by the respective Board without shareholder
approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Series is
required to hold annual meetings of its shareholders. Each Series is required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of a Trustee when requested in writing to do so by the holders of at
least 10% of the Series's outstanding shares entitled to vote. In addition, each
Series is required to call a meeting of shareholders for the purpose of electing
Trustees if, at any time, less than a majority of the Trustees holding office
was elected by shareholders.
Shareholders of Institutional Fund are entitled to vote on all matters
submitted to a vote of its shareholders under its Declaration of Trust, which
includes the power to vote (i) for the election or removal of Trustees as
provided in the Declaration of Trust, and (ii) with respect to such additional
matters relating to Institutional Fund as may be required by applicable law, the
Declaration of Trust, its By-Laws or any registration of Institutional Fund with
the SEC (or any successor agency) or any state, or as the Board may consider
necessary or desirable. Each whole share is entitled to one vote as to any
matter on which it is entitled to vote and each fractional share is entitled to
a proportionate fractional vote.
Under its Declaration of Trust, Allocation Fund shareholders are entitled to
vote only with respect to the following matters: (1) the election or removal of
Trustees if a meeting is called for such purpose; (2) the adoption of any
contract for which shareholder approval is required by the Investment Company
Act; (3) any amendment of the Declaration of Trust, other than amendments to
change Allocation Fund's name,
17
<PAGE>
authorize additional series of shares, supply any omission or cure, or correct
or supplement any ambiguity or defective or inconsistent provision contained
therein; (4) any termination or reorganization of Allocation Fund to the extent
and as provided in the Declaration of Trust; (5) a determination as to whether a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of Allocation Fund or its
shareholders, to the same extent as the shareholders of a Massachusetts business
corporation would be entitled to vote on such a determination; (6) with respect
to any plan of distribution adopted pursuant to Rule 12b-1 under the Investment
Company Act; and (7) such additional matters relating to Allocation Fund as may
be required by law, the Declaration of Trust, its By-Laws, or any registration
of Allocation Fund with the SEC or any state securities commission, or as the
Board may consider necessary or desirable. Allocation Fund shareholders also
vote upon changes in fundamental investment policies or restrictions.
Allocation Fund's Declaration of Trust provides that a "Majority Shareholder
Vote" of Allocation Fund is required to decide any question. "Majority
Shareholder Vote" means the vote of the holders of a majority of shares, which
shall consist of: (i) a majority of shares represented in person or by proxy and
entitled to vote at a meeting of shareholders at which a quorum, as determined
in accordance with the By-Laws, is present; (ii) a majority of shares issued and
outstanding and entitled to vote when action is taken by written consent of
shareholders; or (iii) a "majority of the outstanding voting securities," as
that phrase is defined in the Investment Company Act, when action is taken by
shareholders with respect to approval of an investment advisory or management
contract or an underwriting or distribution agreement or continuance thereof.
Allocation Fund's By-Laws provide that a majority of the outstanding shares
shall constitute a quorum for the transaction of business at a shareholders'
meeting. Institutional Fund's Declaration of Trust states that, except when a
larger quorum is required by applicable law, by Institutional Fund's By-Laws or
by the Declaration of Trust, forty percent (40%) of the shares entitled to vote
at a shareholder meeting shall constitute a quorum for the transaction of
business at a shareholders' meeting.
SHAREHOLDER LIABILITY. Under Delaware law, Balanced Fund's shareholders
have no personal liability for Balanced Fund's acts or obligations.
Under Massachusetts law, Allocation Fund's shareholders, under certain
circumstances, could be held personally liable for its obligations. However,
Allocation Fund's Declaration of Trust disclaims shareholder liability for acts
or obligations of Allocation Fund and requires that notice of such disclaimer be
given in each note, bond, contract, order, agreement, obligation or instrument
entered into or executed by Allocation Fund or its Trustees. The Declaration of
Trust provides for indemnification out of Allocation Fund's property for all
losses and expenses of any shareholder held personally liable for its
obligations solely by reason of his or her being or having been an Allocation
Fund shareholder and not because of his or her acts or omissions or some other
reason. Thus, Allocation Fund considers the risk of a shareholder incurring
financial loss on account of shareholder liability to be remote since it is
limited to circumstances in which a disclaimer is inoperative or Allocation Fund
itself would be unable to meet its obligations.
LIABILITY AND INDEMNIFICATION OF TRUSTEES. Under Allocation Fund's
Declaration of Trust, a Trustee is entitled to indemnification against all
liability and expenses reasonably incurred by him or her in connection with the
defense or disposition of any threatened or actual proceeding by reason of his
or her being or having been a Trustee, unless such Trustee shall have been
adjudicated to have acted with bad faith, willful misfeasance, gross negligence
or in reckless disregard of his or her duties. Generally, under Institutional
Fund's Declaration of Trust and Delaware law, no Trustee or officer of
Institutional Fund shall be liable to
18
<PAGE>
the Institutional Fund or its shareholders for any action or failure to act
except for his or her own bad faith, willful misfeasance, gross negligence or
reckless disregard of his or her duties and is not liable for errors of judgment
or mistakes.
Under the Investment Company Act, a Trustee may not be protected against
liability to a Fund and its security holders to which he or she would otherwise
be subject as a result of his or her willful misfeasance, bad faith or gross
negligence in the performance of his or her duties, or by reason of reckless
disregard of his or her obligations and duties. The staff of the SEC interprets
the Investment Company Act to require additional limits on indemnification of
Trustees and officers.
The foregoing is only a summary of certain differences between Institutional
Fund, its Declaration of Trust, its By-Laws and Delaware law, and Allocation
Fund, its Declaration of Trust, its By-Laws and Massachusetts law.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of Balanced Fund and the
Portfolio (Class Z) as of March 31, 1996 and the pro forma combined
capitalization of both Series as if the Reorganization had occured on that date.
<TABLE>
<CAPTION>
PRO
BALANCED PORTFOLIO-- FORMA
FUND CLASS Z* COMBINED
-------- ----------- --------
<S> <C> <C> <C>
Net Assets (000)......... $99,804 $ 4,289 $104,093
Net Asset Value per
share................... $12.58 $12.07 $12.07
Shares Outstanding
(000)................... 7,936 355 8,624
</TABLE>
- ------------------
* Class Z shares commenced being offered on March 1, 1996.
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Balanced Fund for
the fiscal year ended September 30, 1995, and of the Portfolio for the one-month
period ended March 31, 1996 (annualized). Class Z shares of the Portfolio were
first publicly offered on March 1, 1996. The ratios also are shown on a pro
forma combined basis, assuming the Reorganization occurs on or about September
20, 1996.
<TABLE>
<CAPTION>
PRO
BALANCED PORTFOLIO-- FORMA
FUND CLASS Z COMBINED
-------- ----------- --------
<S> <C> <C> <C>
Ratio of expenses to
average net assets
(a)..................... 1.00% .87% .95%
Ratio of net investment
income to average net
assets.................. 3.19% 2.47% 2.93%
</TABLE>
- ------------------
(a) Through a period scheduled to end on September 30, 1996, PIFM voluntarily
reimburses Balanced Fund for any expenses in excess of 1.000% of average net
assets. Absent such reimbursement, the ratio of expenses to average net
assets would be 1.096%. If the Reorganization is consummated, PMF will not
continue this expense limitation after the Closing Date.
19
<PAGE>
INFORMATION ABOUT THE PORTFOLIO
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
For additional condensed financial information for the Portfolio, see
"Financial Highlights" in the Allocation Fund Prospectus, which accompanies this
Prospectus and Proxy Statement. The following financial highlights contain
selected data for a Class A, Class B and Class C share outstanding, total
return, ratios to average net assets and other supplemental data for the period
presented. During the period, no Class Z shares were outstanding.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------- ---------------- ----------------
SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1996 JANUARY 31, 1996 JANUARY 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 12.04 $ 12.00 $ 12.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .14 .11 .11
Net realized and unrealized gain on
investment and foreign currency
transactions........................... .42 .40 .40
-------- -------- --------
Total from investment operations.... .56 .51 .51
-------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.14) (.10) (.10)
Distributions paid to shareholders from
net realized gains on investment
transactions........................... (.49) (.49) (.49)
-------- -------- --------
Total distributions................. (.63) (.59) (.59)
-------- -------- --------
Net asset value, end of period.......... $ 11.97 $ 11.92 $ 11.92
-------- -------- --------
-------- -------- --------
TOTAL RETURN(B):........................ 4.65% 4.20% 4.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $273,187 $448,373 $ 2,324
Average net assets (000)................ $220,853 $429,227 $ 1,869
Ratios to average net assets:
Expenses, including distribution
fees................................. 1.19%(a) 1.94%(a) 1.94%(a)
Expenses, excluding distribution
fees................................. .94%(a) .94%(a) .94%(a)
Net investment income................. 2.62%(a) 1.84%(a) 1.83%(a)
Portfolio turnover rate................. 53% 53% 53%
Average commission rate paid per
share.................................. $ 0.0573 $ 0.0573 $ 0.0573
<FN>
- ------------------------------
(a) Annualized.
(b) Total returns do not consider the effects of sales loads. Total returns are
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and include reinvestment of dividends and
other distributions. Total returns for periods of less than a full year are
not annualized.
</TABLE>
20
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of the Portfolio, see "General Information" and "Fund Highlights" in the
Allocation Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of the Portfolio's investment objective and policies and of
risk factors associated with an investment in the Portfolio, see "How the Fund
Invests" in the Allocation Fund Prospectus.
BOARD OF TRUSTEES
For a discussion of the responsibilities of Allocation Fund's Board, see
"How the Fund is Managed" in the Allocation Fund Prospectus. See Appendix D for
information on the nominated slate of Trustees to be presented to Allocation
Fund's shareholders at a special meeting anticipated to be held in October 1996.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Allocation Fund's manager and subadviser and the
Portfolio's portfolio manager, see "How the Fund is Managed--Manager" in the
Allocation Fund Prospectus.
PORTFOLIO TRANSACTIONS
For a discussion of Allocation Fund's policy with respect to brokerage, see
"How the Fund is Managed--Portfolio Transactions" in the Allocation Fund
Prospectus.
PERFORMANCE
For a discussion of the Portfolio's performance during the fiscal year ended
July 31, 1995, see Appendix B hereto.
THE PORTFOLIO SHARES
For a discussion of the Portfolio Class Z shares, including voting rights
and exchange rights, and how the shares may be purchased and redeemed, see
"General Information," "Shareholder Guide" and "How the Fund is Managed" in the
Allocation Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of the Portfolio Class Z shares
is determined, see "How the Fund Values its Shares" in the Allocation Fund
Prospectus.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of Allocation Fund's policy with respect to dividends and
other distributions and the tax consequences of an investment in Class Z shares,
see "Taxes, Dividends and Distributions" in the Allocation Fund Prospectus.
21
<PAGE>
INFORMATION ABOUT BALANCED FUND
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
Unless indicated otherwise, the following financial highlights have been
audited by Deloitte & Touche LLP, independent accountants, whose report thereon
was unqualified. This information is derived from and should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The following financial highlights contain
selected data for a share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED SEPTEMBER
ENDED 30, NOVEMBER 5, 1992(A)
MARCH 31, 1996 -------------------- THROUGH
(UNAUDITED) 1995 1994 SEPTEMBER 30, 1993
--------------- --------- --------- -------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 12.49 $ 11.08 $ 11.80 $ 10.00
------- --------- --------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(b).................................. .17 .18 .31 .31
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................ .62 1.53 (.52) 1.54
------- --------- --------- -------
Total from investment operations...................... .79 1.71 (.21) 1.85
------- --------- --------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income...................... (.34) (.25) (.23) (.05)
Distributions from net realized gains..................... (.36) (.05) (.28) --
------- --------- --------- -------
Total distributions................................... (.70) (.30) (.51) (.05)
------- --------- --------- -------
Net asset value, end of period............................ $ 12.58 $ 12.49 $ 11.08 $ 11.80
------- --------- --------- -------
------- --------- --------- -------
TOTAL RETURN(D):.......................................... 6.53% 15.90% (1.88)% 18.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $ 99,804 $ 82,110 $ 64,313 $ 27,663
Average net assets (000).................................. $ 89,307 $ 70,914 $ 44,048 $ 17,401
RATIOS TO AVERAGE NET ASSETS:(B)
Expenses................................................ 1.00%(c) 1.00% 1.00% 1.00%(c)
Net investment income................................... 2.91%(c) 3.19% 2.86% 3.16%(c)
Portfolio turnover rate................................... 37% 65% 52% 74%
Average commission rate paid per share.................... $ 0.0597 N/A N/A N/A
<FN>
- ------------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total Returns are calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and include reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized. Total returns include the effect of expense
subsidies.
</TABLE>
22
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of Balanced Fund, see "Introduction to the Funds" and "More Facts About the
Company" in the Institutional Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Balanced Fund's investment objective and policies and of
risk factors associated with an investment in Balanced Fund, see "The Funds" and
"Other Investment Practices, Risk Considerations, and Policies of the Funds" in
the Institutional Fund Prospectus.
BOARD OF TRUSTEES
For a discussion of the responsibilities of Institutional Fund's Board, see
"Management of the Company" and "More Facts About the Company" in the
Institutional Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Institutional Fund's manager and subadvisers and
Balanced Fund's portfolio manager, see "Management of the Company" in the
Institutional Fund Prospectus.
PORTFOLIO TRANSACTIONS
For a discussion of Balanced Fund's policy with respect to brokerage, see
"Other Considerations-- Portfolio Transactions" in the Institutional Fund
Prospectus.
PERFORMANCE
For a discussion of Balanced Fund's performance during the fiscal year ended
September 30, 1995, see Appendix C hereto.
BALANCED FUND SHARES
For a discussion of Balanced Fund shares, including voting rights and
exchange rights and how the shares may be purchased and redeemed, see "Investors
Guide to Services" and "More Facts About the Company" in the Institutional Fund
Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of Balanced Fund shares is
determined, see "Other Considerations--Net Asset Value" in the Institutional
Fund Prospectus.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of Balanced Fund's policy with respect to dividends and
other distributions and the tax consequences of an investment in its shares, see
"Other Considerations" in the Institutional Fund Prospectus.
MISCELLANEOUS
ADDITIONAL INFORMATION
Institutional Fund and Allocation Fund are subject to the informational
requirements of the Securities Exchange Act of 1934 and in accordance therewith
file reports and other information with the SEC. Reports and other information
filed by Institutional Fund and Allocation Fund can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New
York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
23
<PAGE>
60661-2511). Copies of such material also can be obtained at prescribed rates
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Allocation Fund
Class Z shares as part of the Reorganization will be passed upon by Gardner,
Carton & Douglas, counsel to Allocation Fund.
EXPERTS
The audited financial statements of Balanced Fund and the Portfolio,
incorporated by reference herein or in the Statement of Additional Information,
have been audited by Deloitte & Touche LLP, independent accountants, to the
extent indicated in its reports thereon, which are included in Institutional
Fund's and Allocation Fund's Annual Reports to Shareholders for the fiscal years
ended September 30, 1995 and July 31, 1995, respectively. The financial
statements audited by Deloitte & Touche LLP have been incorporated by reference
herein or in the Statement of Additional Information in reliance on its reports
given as experts in auditing and accounting.
VOTING INFORMATION
Forty percent of the shares of Balanced Fund outstanding on July 12, 1996,
represented in person or by proxy, must be present for the transaction of
business at the Meeting. In the event that a quorum is not present at the
Meeting, or if a quorum is present but sufficient votes to approve the proposal
are not received, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of Proxies. Any such
adjournment will require the affirmative vote of a majority of those shares
present at the Meeting or represented by proxy. When voting on a proposed
adjournment, the persons named as proxies will vote all shares that they are
entitled to vote for the proposed adjournment, unless directed to disapprove the
proposal, in which case such shares will be voted against the proposed
adjournment. Any questions as to an adjournment of the Meeting will be voted on
by the persons named in the enclosed Proxy in the same manner that the Proxies
are instructed to be voted. In the event that the Meeting is adjourned, the same
procedures will apply at a later Meeting date.
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified on a proxy,
the shares represented thereby will be voted for the proposal. A Proxy may be
revoked at any time prior to the time it is voted by written notice to the
Secretary of Institutional Fund or by attendance at the Meeting. If a Proxy that
is properly executed and returned is accompanied by instructions to withhold
authority to vote (an abstention) or represents a broker "non-vote" (that is, a
Proxy from a broker or nominee indicating that such person has not received
instructions from the beneficial owner or other person entitled to vote shares
on a particular matter with respect to which the broker or nominee does not have
discretionary power), the shares represented thereby, with respect to matters to
be determined by a majority of the votes cast on such matters, will be
considered present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business but, not being cast, will have no effect
on the outcome of such matters.
The close of business on July 12, 1996, has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Balanced Fund had 7,740,785 shares outstanding and
entitled to vote. Each outstanding full share of Balanced Fund will be entitled
to one vote at the Meeting, and each outstanding fractional share of Balanced
Fund will be entitled
24
<PAGE>
to a proportionate fractional part of one vote. As of July 12, 1996, Trustees
and officers of Institutional Fund, as a group, owned less than 1% of Balanced
Fund's outstanding shares and the Trustees and officers of the Allocation Fund,
as a group, owned less than 1% of the Portfolio's outstanding shares. As of July
12, 1996, the following shareholder owned beneficially or of record 5% or more
of the Portfolio's outstanding Class C shares: Prudential Securities Inc., F.A.
Charles A. Linsmeirer, 9952 Wildwood Way, Villa Park CA 92667-4315 owned 20,206
Class C shares (approximately 7% of the outstanding Class C shares). As of July
12, 1996, the following shareholders owned beneficially or of record 5% or more
of Balanced Fund's outstanding shares: PAMCO VCA OA Account, 30 Scranton Office
Park, Moosic PA 18504-1789 owned 1,840,795 shares (approximately 24% of the
outstanding shares); and Prudential Employee Savings Plan, 71 Hanover Road,
Florham Park, NJ 07932-1502 owned 2,186,560 shares (approximately 28% of the
outstanding shares). Prudential intends to vote any shares for which it has
direct voting authority FOR the proposed Reorganization.
The expenses of the Reorganization and the solicitation of proxies will be
borne by Balanced Fund and the Portfolio in proportion to their respective
assets and will include reimbursement of brokerage firms and others for expenses
in forwarding proxy solicitation material to shareholders of Balanced Fund. The
solicitation of proxies will be largely by mail but may include telephonic,
telegraphic or oral communication by regular employees of PIFM and its
affiliates, including PMF. This cost, including specified expenses, also will be
borne by Balanced Fund and the Portfolio in proportion to their respective
assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
Balanced Fund arise, including any question as to an adjournment of the Meeting,
the persons named in the enclosed Proxy will vote thereon according to their
best judgment in the interests of Balanced Fund, taking into account all
relevant circumstances.
SHAREHOLDERS' PROPOSALS
Any Balanced Fund shareholder proposal intended to be presented at any
subsequent meeting of the shareholders of Balanced Fund must be received by
Institutional Fund a reasonable time before the Board's solicitation relating to
such meeting is made in order to be included in Balanced Fund's Proxy Statement
and form of Proxy relating to that meeting. In the event that the Plan is
approved at this Meeting, it is not expected that there will be any future
shareholder meetings of Balanced Fund.
It is the present intent of the Boards of Institutional Fund and Allocation
Fund not to hold annual meetings of shareholders unless the election of Trustees
is required under the Investment Company Act nor to hold special meetings of
shareholders unless required by the Investment Company Act or state law.
S. JANE ROSE
SECRETARY
Dated: July 31, 1996
25
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the 26th day of July, 1996, by and between The Prudential Institutional Fund
(Institutional Fund) and Prudential Allocation Fund (Allocation Fund)
(collectively, the Trusts and each individually, a Trust). Institutional Fund is
a Delaware business trust and maintains its principal place of business at 751
Broad Street, Newark, New Jersey 07102. Allocation Fund is a Massachusetts
business trust and maintains its principal place of business at One Seaport
Plaza, New York, New York 10292. Shares of Institutional Fund are divided into
seven portfolios, including Balanced Fund (Acquiree Fund). Shares of Allocation
Fund are divided into two portfolios, including Balanced Portfolio (Acquiror
Fund) (Acquiror Fund and Acquiree Fund are sometimes referred to herein
collectively as the Funds and each individually as a Fund.). Acquiror Fund
shares are divided into four classes of shares: Class A, Class B, Class C and
Class Z shares; only Class Z shares are involved in the transaction described
herein.
This Agreement is intended to be, and is adopted as, a plan of a
reorganization pursuant to section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of all of the assets of Acquiree Fund in exchange solely for Class Z
shares of Acquiror Fund and Acquiror Fund's assumption of all of Acquiree Fund's
liabilities, if any, and the constructive distribution, after the Closing Date
hereinafter referred to, of such shares of Acquiror Fund to the shareholders of
Acquiree Fund in liquidation of Acquiree Fund as provided herein, all upon the
terms and conditions as hereinafter set forth. (The foregoing transactions are
referred to herein as the Reorganization.)
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF ACQUIREE FUND IN EXCHANGE FOR CLASS Z SHARES OF
ACQUIROR FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND LIQUIDATION OF ACQUIREE
FUND.
1.1 Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Acquiree Fund
agrees to sell, assign, transfer and deliver its assets, as set forth in
paragraph 1.2, to Acquiror Fund, and Acquiror Fund agrees (a) to issue and
deliver to Acquiree Fund in exchange therefor the number of Class Z shares
in Acquiror Fund determined by dividing the net asset value of Acquiree Fund
(computed in the manner and as of the time and date set forth in paragraph
2.1) by the net asset value of a Class Z share of Acquiror Fund (computed in
the manner and as of the time and date set forth in paragraph 2.2); and (b)
to assume all of Acquiree Fund's liabilities, if any, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided
for in paragraph 3 (Closing).
1.2 The assets of Acquiree Fund to be acquired by Acquiror Fund shall
include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property
of any kind owned by Acquiree Fund and any deferred and prepaid expenses
shown as assets on the books of Acquiree Fund on the closing date provided
in paragraph 3.1 (Closing Date).
1.3 Acquiror Fund will assume from Acquiree Fund all debts,
liabilities, obligations and duties of Acquiree Fund of whatever kind or
nature, whether absolute, accrued, contingent or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable as
of the Closing
A-1
<PAGE>
Date, and whether or not specifically referred to in this Agreement;
provided, however, that Acquiree Fund agrees to utilize its best efforts to
discharge all of its known debts, liabilities, obligations and duties prior
to the Closing Date.
1.4 On or immediately prior to the Closing Date, Acquiree Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of its investment company taxable
income (computed without regard to any deduction for dividends paid), net
tax-exempt interest income, if any, and realized net capital gains, if any,
for all taxable years through its liquidation.
1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, Acquiree Fund will distribute PRO RATA to its
shareholders of record, determined as of the close of business on the
Closing Date, the shares of Acquiror Fund received by Acquiree Fund pursuant
to paragraph 1.1 in exchange for their interest in Acquiree Fund. Such
distribution will be accomplished by opening accounts on the books of
Acquiror Fund in the names of Acquiree Fund shareholders and transferring
thereto the shares credited to the account of Acquiree Fund on the books of
Acquiror Fund. Each such shareholder account shall be credited with the
respective PRO RATA number of Acquiror Fund shares due the shareholder in
whose name the account is established. Fractional shares of Acquiror Fund
shall be rounded to the third decimal place. Acquiror Fund shall not issue
certificates representing its shares in connection with such distribution.
1.6 Ownership of Acquiror Fund shares will be shown on the books of
Allocation Fund's transfer agent. Shares of Acquiror Fund will be issued in
the manner described in Acquiror Fund's then-current prospectus and
statement of additional information.
1.7 Any transfer taxes payable upon issuance of shares of Acquiror
Fund in a name other than the registered holder of the shares on the books
of Acquiree Fund as of the time of transfer thereof shall be paid by the
person to whom such shares are to be issued as a condition to the
registration of such transfer.
1.8 Any reporting responsibility with the Securities and Exchange
Commission (SEC) or any state securities commission of Acquiree Fund is and
shall remain the responsibility of Acquiree Fund up to and including the
Liquidation Date.
1.9 All books and records of Acquiree Fund, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to Acquiror Fund from and after the Closing Date and shall be
turned over to Acquiror Fund on or prior to the Liquidation Date.
1.10 As soon as reasonably practicable after distribution of the
Acquiror Fund shares pursuant to paragraph 1.5, Acquiree Fund shall be
terminated as a series of Institutional Fund and any further actions shall
be taken in connection therewith as required by applicable law.
2. VALUATION
2.1 The value of Acquiree Fund's assets and liabilities to be acquired
and assumed, respectively, by Acquiror Fund shall be the net asset value of
Acquiree Fund computed as of 4:15 p.m., New York time, on the Closing Date
(such time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Acquiree Fund's then-current prospectus
and statement of additional information.
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2.2 The net asset value of a Class Z share of Acquiror Fund shall be
the net asset value per such share computed as of the Valuation Time, using
the valuation procedures set forth in Acquiror Fund's then-current
prospectus and statement of additional information.
2.3 All computations of net asset value shall be made by or under the
direction of Prudential Mutual Fund Management, Inc. (PMF) in accordance
with its regular practice as manager or administrator, as the case may be,
of each Trust.
3. CLOSING AND CLOSING DATE
3.1 Except as provided in paragraph 3.3, the date of the closing shall
be September 20, 1996, or such later date as the parties may agree to
(Closing Date). All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Acquiror Fund or
at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian
for Acquiree Fund, shall deliver to Allocation Fund at the Closing a
certificate of an authorized officer of State Street stating that (a)
Acquiree Fund's portfolio securities, cash and any other assets have been
transferred in proper form to Acquiror Fund on the Closing Date and (b) all
necessary taxes, if any, have been paid, or provision for payment has been
made, in conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange (NYSE) or other primary exchange is closed to
trading (other than prior to, or following the close of, trading on such
exchange on a regular business day) or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or other primary exchange or
elsewhere is disrupted so that accurate appraisal of the value of the net
assets of Acquiree Fund and of the net asset value per Class Z share of
Acquiror Fund is impracticable, the Closing Date shall be postponed until
the first business day after the date when such trading shall have been
fully resumed and such reporting shall have been restored.
3.4 Institutional Fund shall deliver to Allocation Fund on or prior to
the Liquidation Date the names and addresses of Acquiree Fund's shareholders
and the number of outstanding shares owned by each such shareholder, all as
of the close of business on the Closing Date, certified by the Secretary or
Assistant Secretary of Institutional Fund. Allocation Fund shall issue and
deliver to Institutional Fund at the Closing a confirmation or other
evidence satisfactory to Institutional Fund that shares of Acquiror Fund
have been or will be credited to Acquiree Fund's account on the books of
Acquiror Fund. At the Closing each party shall deliver to the other such
bills of sale, checks, assignments, share certificates, receipts and other
documents as such other party or its counsel may reasonably request to
effect the transactions contemplated by this Agreement.
3.5 Each Trust shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and
substance satisfactory to the recipient and dated the Closing Date, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Closing Date except as they may be affected by the
transactions contemplated by this Agreement.
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4. REPRESENTATIONS AND WARRANTIES
4.1 Institutional Fund represents and warrants as follows:
4.1.1 Institutional Fund is a business trust duly organized and
validly existing under the laws of the State of Delaware, and Acquiree
Fund has been established in accordance with the terms of Institutional
Fund's Agreement and Declaration of Trust (Declaration of Trust);
4.1.2 Institutional Fund is an open-end management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.1.3 Institutional Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of its Declaration of Trust or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which Acquiree Fund is a party or by which Acquiree Fund is bound;
4.1.4 All material contracts or other commitments of Acquiree
Fund, or any of its properties or assets, except this Agreement and
investment contracts (including options, futures and forward contracts)
will be terminated, or provision for discharge of any liabilities of
Acquiree Fund thereunder will be made on or prior to the Closing Date
without either Fund's incurring any liability or penalty with respect
thereto;
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Acquiree Fund or any of
its properties or assets, except as previously disclosed in writing to
Allocation Fund. Institutional Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings or
investigation, and Acquiree Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Acquiree Fund at September 30, 1995 and for
the year then ended (copies of which have been furnished to Allocation
Fund) have been audited by Deloitte & Touche LLP, independent
accountants, in accordance with generally accepted auditing standards.
Such financial statements are prepared in accordance with generally
accepted accounting principles and present fairly, in all material
respects, the financial condition, results of operations, changes in net
assets and financial highlights of Acquiree Fund as of and for the period
ended on such date, and there are no material known liabilities of
Acquiree Fund (contingent or otherwise) not disclosed therein;
4.1.7 Since September 30, 1995, there has not been any material
adverse change in Acquiree Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Acquiree Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by Allocation Fund. For the
purposes of this paragraph 4.1.7, a decline in net asset value or a
decrease in the number of shares outstanding shall not constitute a
material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Acquiree Fund required by law to have
been filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports shall
have been paid insofar as due, or provision shall have been made for the
payment thereof, and, to the
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best of Institutional Fund's knowledge, all federal or other taxes
required to be shown on any such return or report have been shown on such
return or report, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
4.1.9 Acquiree Fund is a "fund" as defined in section 851(h)(2) of
the Internal Revenue Code; for each past taxable year since it commenced
operations, Acquiree Fund (a) has met the requirements of Subchapter M of
the Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current
taxable year and (b) has made such distributions as are necessary to
avoid the imposition of federal excise tax or has paid or provided for
the payment of any excise tax imposed; and Acquiree Fund has no earnings
and profits accumulated in any taxable year in which the provisions of
Subchapter M of the Internal Revenue Code did not apply to it. Acquiree
Fund's assets shall be invested at all times through the Closing Date in
a manner that ensures compliance with the foregoing;
4.1.10 All issued and outstanding shares of Acquiree Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Acquiree Fund will, at the time of the Closing, be held in the
names of the persons and in the amounts set forth in the list of
shareholders submitted to Allocation Fund in accordance with the
provisions of paragraph 3.4. Acquiree Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares, nor is there outstanding any security convertible into any of its
shares;
4.1.11 At the Closing Date, Acquiree Fund will have good and
marketable title to its assets to be transferred to Acquiror Fund
pursuant to paragraph 1.1 and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment for
such assets, Acquiror Fund will acquire good and marketable title
thereto;
4.1.12 The execution, delivery and performance of this Agreement
have been duly authorized by the Board of Trustees of Institutional Fund
and by all necessary corporate action, other than shareholder approval,
on the part of Acquiree Fund, and this Agreement constitutes a valid and
binding obligation of Institutional Fund, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws relating
to or affecting creditors' rights and by general principles of equity. At
the Closing Date, the performance of this Agreement shall have been duly
authorized by all necessary action by Acquiree Fund's shareholders;
4.1.13 The information furnished and to be furnished by
Institutional Fund for use in applications for orders, registration
statements, proxy materials and other documents that may be necessary in
connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is in compliance and
shall comply in all material respects with applicable federal securities
and other laws and regulations; and
4.1.14 On the effective date of the registration statement filed
with the SEC by Allocation Fund on Form N-14 relating to the shares of
Acquiror Fund issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders
of Acquiree Fund and on the Closing Date, the Proxy Statement of
Institutional Fund and the Prospectus of Acquiror Fund to be included in
the Registration Statement (collectively, Proxy Statement)
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(a) will comply in all material respects with the provisions of
the Securities Act of 1933 (1933 Act), the Securities Exchange Act of
1934 (1934 Act) and the Investment Company Act and the rules and
regulations thereunder and
(b) will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein in light of
the circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by Allocation Fund for
use therein.
4.2 Allocation Fund represents and warrants as follows:
4.2.1 Allocation Fund is a business trust duly organized and
validly existing under the laws of the Commonwealth of Massachusetts, and
Acquiror Fund has been duly established in accordance with the terms of
Allocation Fund's Declaration of Trust;
4.2.2 Allocation Fund is an open-end management investment company
duly registered under the Investment Company Act, and such registration
is in full force and effect;
4.2.3 Allocation Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of its Declaration of Trust or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which Acquiror Fund is a party or by which Acquiror Fund is bound;
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Acquiror Fund or any of
its properties or assets, except as previously disclosed in writing to
Institutional Fund. Allocation Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings or
investigation, and Acquiror Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Acquiror Fund at July 31, 1995 and for the
fiscal year then ended (copies of which have been furnished to
Institutional Fund) have been audited by Deloitte & Touche LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Acquiror Fund as of and
for the period ended on such date, and there are no material known
liabilities of Acquiror Fund (contingent or otherwise) not disclosed
therein;
4.2.6 Since July 31, 1995, there has not been any material adverse
change in Acquiror Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by Acquiror Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by Institutional Fund. For the purposes of this
paragraph 4.2.6, a decline in net asset value or a decrease in the number
of shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Acquiror Fund required by law to have
been filed on or before such dates shall have been
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timely filed, and all federal and other taxes shown as due on said
returns and reports shall have been paid insofar as due, or provision
shall have been made for the payment thereof, and, to the best of
Allocation Fund's knowledge, all federal or other taxes required to be
shown on any such return or report are shown on such return or report, no
such return is currently under audit and no assessment has been asserted
with respect to such returns;
4.2.8 Acquiror Fund is a "fund" as defined in section 851(h)(2) of
the Internal Revenue Code; for each past taxable year since it commenced
operations, Acquiror Fund (a) has met the requirements of Subchapter M of
the Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current
taxable year and (b) has made such distributions as are necessary to
avoid the imposition of federal excise tax or has paid or provided for
the payment of any excise tax imposed; and Acquiror Fund has no earnings
and profits accumulated in any taxable year in which the provisions of
Subchapter M of the Internal Revenue Code did not apply to it. Acquiror
Fund's assets shall be invested at all times through the Closing Date in
a manner that ensures compliance with the foregoing;
4.2.9 All issued and outstanding shares of Acquiror Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by
this Agreement, Acquiror Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any of its shares
except for the Class B shares that have the conversion feature described
in Acquiror Fund's current prospectus;
4.2.10 The execution, delivery and performance of this Agreement
have been duly authorized by the Board of Trustees of Allocation Fund and
by all necessary corporate action on the part of Acquiror Fund, and this
Agreement constitutes a valid and binding obligation of Allocation Fund,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting creditors' rights
and by general principles of equity;
4.2.11 The shares of Acquiror Fund to be issued and delivered to
Acquiree Fund pursuant to this Agreement will, at the Closing Date, have
been duly authorized and, when issued and delivered as provided in this
Agreement, will be duly and validly issued and outstanding shares of
Acquiror Fund, fully paid and non-assessable, except to the extent that
under Massachusetts law shareholders of a business trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiror Fund has any pre-emptive right to subscribe
therefor or purchase such shares;
4.2.12 The information furnished and to be furnished by Allocation
Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with
the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Acquiree Fund and on the
Closing Date, the Proxy Statement (a) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the
Investment Company Act and the rules and regulations thereunder and (b)
will not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading;
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provided, however, that the representations and warranties in this
paragraph 4.2.13 shall not apply to statements in or omissions from the
Proxy Statement made in reliance upon and in conformity with information
furnished by Institutional Fund for use therein.
5. COVENANTS
5.1 Each Trust covenants to operate its respective Fund's business in
the ordinary course between the date hereof and the Closing Date, it being
understood that the ordinary course of business will include declaring and
paying customary dividends and other distributions and such changes in
operations as are contemplated by the normal operations of the Funds, except
as may otherwise be required by paragraph 1.4 hereof; provided that Acquiree
Fund shall not dispose of more than an insignificant portion of its historic
business assets during such period without Acquiror Fund's prior consent.
5.2 Institutional Fund covenants to call a meeting of Acquiree Fund's
shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated hereby
(including the determinations of its Trustees as set forth in Rule 17a-8(a)
under the Investment Company Act).
5.3 Institutional Fund covenants that Acquiror Fund shares to be
received by Acquiree Fund in accordance herewith are not being acquired for
the purpose of making any distribution thereof other than in accordance with
the terms of this Agreement.
5.4 Institutional Fund covenants that it will assist Allocation Fund
in obtaining such information as Allocation Fund reasonably requests
concerning the beneficial ownership of Acquiree Fund's shares.
5.5 Subject to the provisions of this Agreement, each Trust will take,
or cause to be taken, all action, and will do, or cause to be done, all
things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6 Institutional Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such act.
5.7 Institutional Fund covenants that it will, from time to time, as
and when requested by Allocation Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Allocation Fund may deem
necessary or desirable in order to vest in and confirm to Allocation Fund
(on behalf of Acquiror Fund) title to and possession of all the assets of
Acquiree Fund to be sold, assigned, transferred and delivered hereunder and
otherwise to carry out the intent and purpose of this Agreement.
5.8 Allocation Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Trustees as set forth in
Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the
Closing Date.
5.9 Allocation Fund covenants that it will, from time to time, as and
when requested by Institutional Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take and cause to be taken such further action, as Institutional Fund may
deem necessary or desirable in order to (a) vest in and confirm to
Institutional Fund (on behalf of
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Acquiree Fund) title to and possession of all the shares of Acquiror Fund to
be transferred to Acquiree Fund pursuant to this Agreement and (b) assume
all of Acquiree Fund's liabilities in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INSTITUTIONAL FUND
The obligations of Institutional Fund to consummate the transactions
provided for herein shall be subject to the performance by Allocation Fund of
all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
6.1 All representations and warranties of Allocation Fund contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
6.2 Allocation Fund shall have delivered to Institutional Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Allocation Fund, in form and substance satisfactory to
Institutional Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Allocation Fund in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected by
the transactions contemplated by this Agreement, and as to such other
matters as Institutional Fund shall reasonably request.
6.3 Institutional Fund shall have received on the Closing Date a
favorable opinion from Gardner, Carton & Douglas, counsel to Allocation
Fund, dated as of the Closing Date, to the effect that:
6.3.1 Allocation Fund is a business trust duly organized and
validly existing under the laws of the Commonwealth of Massachusetts,
with power under its Declaration of Trust to own all of its properties
and assets and, to the knowledge of such counsel, to carry on its
business as presently conducted, and Acquiror Fund has been duly
established in accordance with the terms of Allocation Fund's Declaration
of Trust;
6.3.2 This Agreement has been duly authorized, executed and
delivered by Allocation Fund and, assuming due authorization, execution
and delivery of this Agreement by Institutional Fund, is a valid and
binding obligation of Allocation Fund enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding
at law or in equity), and further subject to the qualifications set forth
in the next succeeding sentence. Such counsel may state that they express
no opinion as to the validity or enforceability of any provision
regarding choice of New York law to govern this Agreement;
6.3.3 The shares of Acquiror Fund to be distributed to Acquiree
Fund shareholders under this Agreement, assuming their due authorization
and delivery as contemplated by this Agreement, will be validly issued
and outstanding and fully paid and non-assessable, except to the extent
that under Massachusetts law shareholders of a business trust may, under
certain circumstances, be held personally liable for its obligations, and
no shareholder of Acquiror Fund has any pre-emptive right to subscribe
therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and
the performance by Allocation Fund of its obligations hereunder will not,
(a) violate Allocation Fund's Declaration of Trust or By-Laws or (b)
result in a default or a breach of (i) the Management Agreement dated
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March 1, 1988 between Allocation Fund and PMF, (ii) the Custodian
Agreement dated February 16, 1990 between Allocation Fund and State
Street, (iii) the Restated Distribution Agreement dated May 8, 1996
between Allocation Fund and Prudential Securities Incorporated and (iv)
the Transfer Agency and Service Agreement dated January 1, 1988 between
Allocation Fund and Prudential Mutual Fund Services, Inc.; provided,
however, that such counsel may state that they express no opinion with
respect to federal or state securities laws, other antifraud laws and
fraudulent transfer laws; provided further that insofar as performance by
Allocation Fund of its obligations under this Agreement is concerned,
such counsel may state that they express no opinion as to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
6.3.5 To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, filing or
order of any court or governmental authority is required for the
consummation by Allocation Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act and
the Investment Company Act and such as may be required under state Blue
Sky or securities laws;
6.3.6 Allocation Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration; and
6.3.7 To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administration
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Allocation Fund (with respect
to Acquiror Fund) or any of its properties or assets distributable or
allocable to Acquiror Fund, and (b) Allocation Fund is not a party to or
subject to the provision of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business,
except as otherwise disclosed.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Allocation Fund and certificates of
public officials. As to matters of Massachusetts law, such counsel may rely upon
opinions of Massachusetts counsel reasonably satisfactory to Institutional Fund,
in which case the opinion shall state that both such counsel and Institutional
Fund are justified in so relying. In rendering such opinion, such counsel also
may (a) make assumptions regarding the authenticity, genuineness and/or
conformity of documents and copies thereof without independent verification
thereof, (b) limit such opinion to applicable federal and state law and (c)
define the word "knowledge" and related terms to mean the knowledge of attorneys
then with such firm who have devoted substantive attention to matters directly
related to this Agreement and the Reorganization.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ALLOCATION FUND
The obligations of Allocation Fund to complete the transactions provided for
herein shall be subject to the performance by Institutional Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
7.1 All representations and warranties of Institutional Fund contained
in this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
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7.2 Institutional Fund shall have delivered to Allocation Fund on the
Closing Date a statement of Acquiree Fund's assets and liabilities, which
statement shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of Acquiree Fund's
portfolio securities showing the adjusted tax bases of such securities by
lot, as of the Closing Date, certified by the Treasurer of Institutional
Fund.
7.3 Institutional Fund shall have delivered to Allocation Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Institutional Fund, in form and substance satisfactory to
Allocation Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Institutional Fund made in this Agreement
are true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Allocation Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Acquiree Fund shall
have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially
all (and in any event not less than ninety-eight percent) of its investment
company taxable income (computed without regard to any deduction for
dividends paid), net tax-exempt interest income, if any, and realized net
capital gain, if any, for all taxable years through its liquidation.
7.5 Allocation Fund shall have received on the Closing Date a
favorable opinion from Kirkpatrick & Lockhart LLP, counsel to Institutional
Fund, dated as of the Closing Date, to the effect that:
7.5.1 Institutional Fund is a business trust duly organized and
validly existing under the laws of the State of Delaware, with power
under its Declaration of Trust to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its business as
presently conducted, and Acquiree Fund has been duly established in
accordance with the terms of Institutional Fund's Declaration of Trust;
7.5.2 This Agreement has been duly authorized, executed and
delivered by Institutional Fund and, assuming due authorization,
execution and delivery of this Agreement by Acquiror Fund, is a valid and
binding obligation of Institutional Fund enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding
at law or in equity), and further subject to the qualifications set forth
in the next succeeding sentence. Such counsel may state that they express
no opinion as to the validity or enforceability of any provision
regarding choice of New York law to govern this Agreement;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Institutional Fund of its obligations hereunder will not,
(a) violate Institutional Fund's Declaration of Trust or By-Laws or (b)
result in a default or a breach of (i) the Management Agreement dated
October 30, 1992 between Institutional Fund and Prudential Institutional
Fund Management, Inc., (ii) the Custodian Agreement dated October 30,
1992 between Institutional Fund and State Street, (iii) the Distribution
Agreement with respect to Acquiree Fund dated May 1, 1993 between
Institutional Fund and Prudential Retirement Services, Inc., and (iv) the
Administration, Transfer Agency and Service Agreement, dated October 30,
1992 between Institutional Fund and PMF; provided, however, that such
counsel may state that they express no opinion with respect to federal or
state securities laws, other antifraud laws and fraudulent transfer laws;
provided further that insofar as performance by Institutional Fund of its
obligations under this Agreement is concerned,
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such counsel may state that they express no opinion as to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
7.5.4 All regulatory consents, authorizations and approvals
required to be obtained by Institutional Fund under the federal laws of
the United States, the laws of the State of New York and Chapter 38 of
the Delaware Code for the consummation of the transactions contemplated
by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Acquiree Fund that would be
required to be disclosed in the Registration Statement and is not so
disclosed;
7.5.6 Institutional Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration; and
7.5.7 To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administration
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Institutional Fund (with
respect to Acquiree Fund) or any of its properties or assets
distributable or allocable to Acquiree Fund, and (b) Institutional Fund
is not a party to or subject to the provision of any order, decree or
judgment of any court or governmental body that materially and adversely
affects its business, except as otherwise disclosed.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Institutional Fund and certificates of
public officials. As to matters of Delaware law, such counsel may rely upon
opinions of Delaware counsel reasonably satisfactory to Allocation Fund, in
which case the opinion shall state that both such counsel and Allocation Fund
are justified in so relying. In rendering such opinion, such counsel also may
(a) make assumptions regarding the authenticity, genuineness and/or conformity
of documents and copies thereof without independent verification thereof, (b)
limit such opinion to applicable federal and state law and (c) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUSTS
The obligations of each Trust hereunder are subject to the further
conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Trustees of each Trust as to
the determinations set forth in Rule 17a-8(a) under the Investment Company
Act, (b) the Trustees of Allocation Fund as to the assumption by Acquiror
Fund of the liabilities of Acquiree Fund and (c) the holders of the
outstanding shares of Acquiree Fund in accordance with the provisions of
Institutional Fund's Declaration of Trust, and certified copies of the
resolutions evidencing such approvals shall have been delivered to
Allocation Fund.
8.2 Any proposed change to Acquiror Fund's operations that may be
approved by the Trustees of Allocation Fund subsequent to the date of this
Agreement but in connection with and as a condition to implementing the
transactions contemplated by this Agreement, for which the approval of
Acquiror Fund's shareholders is required pursuant to the Investment Company
Act or otherwise, shall have been
A-12
<PAGE>
approved by the requisite vote of the holders of the outstanding shares of
Acquiror Fund in accordance with the Investment Company Act and the
provisions of Allocation Fund's Declaration of Trust, and certified copies
of the resolution evidencing such approval shall have been delivered to
Institutional Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits
of federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by either Trust to permit
consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of either Fund, provided that either
party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated. In addition, the
SEC shall not have issued an unfavorable report with respect to the
Reorganization under section 25(b) of the Investment Company Act nor
instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the Investment
Company Act.
8.6 The Trusts shall have received on or before the Closing Date an
opinion of Kirkpatrick & Lockhart LLP, satisfactory to each Trust,
substantially to the effect that for federal income tax purposes:
8.6.1 The acquisition by Acquiror Fund of the assets of Acquiree
Fund in exchange solely for voting shares of Acquiror Fund and the
assumption by Acquiror Fund of Acquiree Fund's liabilities, if any,
followed by the distribution of those Acquiror Fund shares by Acquiree
Fund PRO RATA to its shareholders, pursuant to its liquidation and
constructively in exchange for their Acquiree Fund shares, will
constitute a reorganization within the meaning of section 368(a)(1)(C) of
the Internal Revenue Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Internal
Revenue Code;
8.6.2 Acquiree Fund's shareholders will recognize no gain or loss
upon the constructive exchange of all of their shares of Acquiree Fund
solely for shares of Acquiror Fund in complete liquidation of Acquiree
Fund;
8.6.3 No gain or loss will be recognized to Acquiree Fund upon the
transfer of its assets to Acquiror Fund in exchange solely for shares of
Acquiror Fund and the assumption by Acquiror Fund of Acquiree Fund's
liabilities, if any, and the subsequent distribution of those shares to
Acquiree Fund shareholders in complete liquidation of Acquiree Fund;
8.6.4 No gain or loss will be recognized to Acquiror Fund upon the
acquisition of Acquiree Fund's assets in exchange solely for shares of
Acquiror Fund and the assumption of Acquiree Fund's liabilities, if any;
8.6.5 Acquiror Fund's basis for those assets will be the same as
the basis thereof in Acquiree Fund's hands immediately before the
transfer, and Acquiror Fund's holding period for those assets will
include Acquiree Fund's holding period therefor;
A-13
<PAGE>
8.6.6 An Acquiree Fund shareholder's basis for the shares of
Acquiror Fund to be received by it pursuant to the Reorganization will be
the same as its basis for the shares of Acquiree Fund to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of Acquiror Fund shares to be received by
an Acquiree Fund shareholder pursuant to the Reorganization will include
the period during which the Acquiree Fund shares to be constructively
surrendered in exchange therefor were held; provided such Acquiree Fund
shares were held as capital assets by that shareholder on the date of the
exchange.
In rendering such opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made in
this Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 3.5.
9. FINDER'S FEES AND EXPENSES
9.1 Each Trust represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for
herein.
9.2 The expenses incurred in connection with entering into and
carrying out the provisions of this Agreement shall be allocated to the
Funds PRO RATA in a fair and equitable manner in proportion to their
respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the
Trusts.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
Either Trust may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or
11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will
not or cannot be met; or
11.3 A mutual written agreement of the Trusts.
In the event of any such termination, there shall be no liability for
damages on the part of either Trust (other than the liability of the Funds to
pay their allocated expenses pursuant to paragraph 9.2) or any Trustee or
officer of either Trust.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the Acquiree Fund's shareholders'
meeting called by Institutional Fund pursuant to paragraph 5.2, no such
amendment may have the effect of changing the provisions for determining the
number of shares of Acquiror Fund to be distributed to Acquiree Fund
shareholders under this Agreement to the detriment of such shareholders without
their further approval.
A-14
<PAGE>
13. NOTICES
Any notice, report, demand or other communication to either party required
or permitted by any provision of this Agreement shall be in writing and shall be
given by hand delivery, or prepaid certified mail or overnight service,
addressed to such party c/o Prudential Mutual Fund Management, Inc., One Seaport
Plaza, New York, New York 10292, Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each
of which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
14.4 This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.
15. MISCELLANEOUS
The Trustees of Allocation Fund have authorized the execution of this
Agreement in their capacity as trustees and not individually, and Institutional
Fund agrees that neither the shareholders nor the Trustees nor any officer,
employee, representative or agent of Allocation Fund shall be personally liable
upon, nor shall resort be had to their private property for the satisfaction of,
obligations given, executed or delivered on behalf of or by Allocation Fund,
that the shareholders of Allocation Fund shall not be personally liable
hereunder, and that Institutional Fund shall look solely to the property of
Allocation Fund for the satisfaction of any claim hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.
THE PRUDENTIAL INSTITUTIONAL FUND,
on behalf of its series, Balanced
Fund
By: /s/ MARK R. FETTING
------------------------------------
Mark R. Fetting
President
PRUDENTIAL ALLOCATION FUND
on behalf of its series, Balanced
Portfolio
By: /s/ RICHARD A. REDEKER
------------------------------------
Richard A. Redeker
President
A-15
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
PORTFOLIO
MANAGER'S REPORT
Many stocks and bonds posted double-digit total returns over the last 12
months. So, too, did your Prudential Allocation Fund: Balanced Portfolio and
Strategy Portfolio, although both trailed the Lipper Flexible Portfolio
average.
Stocks were powered primarily by higher corporate profits, and bonds by
lower interest rates. Thus far, 1995 has been an exceptional year for mutual
funds.
A ROUT, THEN A RALLY.
Numbers tell the story: the Standard & Poor's 500 Stock Index, a broad
measure of the U.S. stock market, rose 26% over the last 12 months, while the
Lehman Brothers Aggregate Bond Index gained 10%.
The Dow Jones Industrial Average, a very narrow but frequently cited
market average, set a new record of 4700 in July. To put this year's dynamic
performance in perspective, consider that the stock market's rise in 1995 to
date is more than its increase in all of 1993 and 1994 combined.
What happened? Interest rates peaked last fall, when an inflation scare
drove the 30-year U.S. Treasury bond's yield to 8.2%.
By the end of July, that yield had plummeted to 6.8%, falling almost as
rapidly as it rose last year. Slowing economic growth and tame inflation
nudged the decline in rates.
Technology, financial services and industrial stocks have led the stock
market so far in 1995.
THE ALLOCATION TEAM.
(Photo)
GREG A. SMITH (LEFT), Chief Investment Strategist of Prudential Securities,
provides sector allocation advice for the Strategy Portfolio.
(Photo)
Portfolio Manager GREG GOLDBERG (RIGHT), selects the individual securities
for both portfolios. Greg follows a growth style of investing, selecting
stocks based on their potential to deliver above-average growth in revenues
and earnings.
HOW INVESTMENTS COMPARED.
(AS OF 7/31/95)
(BAR GRAPH)
SOURCE: LIPPER ANALYTICAL SERVICES.
Financial markets change, so a mutual fund's past performance should never be
used to predict future results. The risks to each of the investments listed
above are different -- we provide 12-month total returns for several Lipper
mutual fund categories to show you that reaching for higher yields means
tolerating more risk. The greater the risk, the larger the potential reward or
loss. In addition, we've added historical 20-year average annual returns to
show that 1995's returns (so far) are higher than normal. These returns
assume the reinvestment of dividends.
MONEY MARKET FUNDS attempt to preserve a constant share value; they don't
fluctuate much in price but their returns are generally among the lowest of
the major investment categories.
BOND FUNDS provide more income than stock funds, which can help smooth out
their total returns year by year. But their prices still fluctuate (sometimes
a good deal) and their returns are historically lower than those of stock
funds.
STOCK FUNDS will fluctuate a great deal. Smaller capitalization stocks offer
greater potential for long-term growth but may be more volatile than larger
capitalization stocks. Investors receive higher historical total returns from
stocks than from most other investments.
SECTOR OR SPECIALTY STOCK FUNDS (such as flexible funds) usually entail the
greatest risks because they are not widely diversified. They are designed for
sophisticated investors who can tolerate additional risk in exchange for
higher potential rewards or losses.
B-1
<PAGE>
PRUDENTIAL ALLOCATION FUND:
BALANCED PORTFOLIO
The Portfolio seeks high total investment return consistent with moderate
risk. It invests in a diversified portfolio of equity securities (including
securities convertible into equity securities), debt obligations and money
market instruments.
The equity and debt securities are generally those of larger, more mature
companies and are generally subject to less price volatility than those held
by the Strategy Portfolio. Moreover, the weighted average maturity of the
Portfolio's holdings is usually shorter than that of the Strategy Portfolio.
The Portfolio may invest up to 10% of its assets in debt securities rated
below investment grade, commonly known as "junk bonds," which are subject to
greater risk of loss of principal and interest, including default risk, than
higher-rated bonds. The Portfolio may also engage in various strategies to
reduce certain investment risks and to attempt to enhance return, through the
use of conservative, time-tested derivatives such as options, forward
currency exchange contracts and futures contracts.
- ------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS(1) AS OF 7/31/95
- ------------------------------------------------------------------------
ONE FIVE SINCE(2)
YEAR YEARS INCEPTION
- ------------------------------------------------------------------------
Class A 13.7% 68.5% 79.6%
Class B 12.8 62.2 90.6
Class C N/A N/A 12.5
Lipper Flexible Portfolio Avg. (3) 16.8% 68.7% 96.1%
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS(1) AS OF 7/31/95
- ------------------------------------------------------------------------
ONE FIVE SINCE(2)
YEAR YEARS INCEPTION
- ------------------------------------------------------------------------
Class A 8.0% 9.9% 10.2%
Class B 7.8 10.0 8.5
Class C N/A N/A 11.5
- ------------------------------------------------------------------------
Past performance is not a guarantee of future results. Principal and
investment return will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
(1) Source: Prudential Mutual Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 5% for Class A
shares and a contingent deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1%
for six years, for Class B shares. Class C shares have a 1% CDSC for one
year. Class B shares automatically convert to Class A shares after
approximately seven years.
(2) Inception dates: 1/22/90 Class A; 9/15/97 Class B; 8/1/94 Class C.
(3) Lipper average returns are for 138 funds for one year, 41 funds for five
years and 15 funds since inception of Class B shares on 9/15/87.
NAME CHANGE
APPROVED.
THE BOARD OF TRUSTEES HAS VOTED TO CHANGE THE NAME OF THE CONSERVATIVELY
MANAGED PORTFOLIO TO THE BALANCED PORTFOLIO, EFFECTIVE WITH THE PUBLICATION
OF A NEW PROSPECTUS ON OR ABOUT SEPTEMBER 29, 1995.
PUTTING CASH
TO WORK.
As the stock and bond markets came alive in early 1995, we put the
Portfolio's substantial cash position (30% of assets as of January 31) to
work, cutting it to less than 13% of assets as of July 31.
Dollar-denominated foreign bonds were reduced to 2% of assets from 6%.
The Portfolio increased holdings in equities to 55% of assets from 47% and
domestic bonds to 29% from 17%.
We increased holdings of technology stocks -- the leading sector this year --
to 17% from 2%.
B-2
<PAGE>
WHAT WENT WELL.
FOCUS ON
TECHNOLOGY, FINANCE.
Our focus on technology stocks benefited the Portfolio, as this sector led
the stock market through July 31. Worldwide demand is surging for
technology-related goods and services.
Companies around the globe are using improved technology to help increase
productivity and keep wages under control. In addition, home computer sales
have risen dramatically in the U.S. as CD-ROM and memory prices have fallen.
Top performing technology holdings in your Fund include Sun Microsystems, our
largest holding, at about 2% of assets, up about 25% in value year-to-date
and VLSI Technology, about 1% of assets, up about 40% year to date.
INVESTMENT ALLOCATION
COMPARISON 1994 VS. 1995
BALANCED PORTFOLIO
(BAR GRAPH)
Our finance holdings (12% of assets) also did well. As of July 31, 1995,
finance was our second largest industry weighting. And it was second only to
technology in the stock market in total return as measured by the S&P 500.
Financial services stocks were direct beneficiaries of lower long-term
interest rates, which made the cost of their raw material -- money --
cheaper. Bank stocks also benefited from continuing industry-wide
consolidation.
Among our best performing financial services holdings over the past six
months were Sun America, representing nearly 2% of assets, up more than 25%
in value year to date and Dean Witter Discover, about 1% of assets, up 25%
year to date.
WE EMPHASIZED
TREASURY AND
CORPORATE BONDS.
Since January, we have lengthened the Portfolio's maturity and shifted
holdings to the Treasury and corporate sectors of the U.S. bond market, which
have led the market this year to date. To do so, we have reduced exposure to
dollar-denominated foreign bonds (to 2% as of July 31, from 6%), and
eliminated our position in short-term, asset-backed securities.
BALANCED PORTFOLIO
WHAT COULD
HAVE GONE
BETTER.
HMO'S WERE HIT.
During the past six months, we added to our positions in health care stocks,
believing they would do well, particularly as HMOs are able to reduce the
cost of group medical plans. While we were able to take advantage of low
prices, our holdings have not appreciated because highly competitive pricing
has temporarily hurt earnings.
A TALE OF TWO STOCKS
Two of our consumer growth holdings also suffered: Fruit of the Loom and
discount retailer Caldor. Fruit of the Loom's emphasis on discounting hurt
company earnings. Discount retailer Caldor performed dramatically below
expectations because of mounting competitive pressures within the industry
and the bankruptcy filing of Bradlees.
B-3
<PAGE>
PRUDENTIAL ALLOCATION FUND: BALANCED PORTFOLIO, LEHMAN
GOV'T./CORP. INDEX & S&P 500: COMPARING A $10,000 INVESTMENT.
Class A (GRAPH)
Class B (GRAPH)
Class C (GRAPH)
- ------------------------------------------------------------------------
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will
be worth more or less than their original cost. The charts on the right are
designed to give you an idea how much the Fund's returns can fluctuate from
year to year by measuring the best and worst years in terms of total annual
return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Allocation Fund (Balanced
Portfolio Class A, Class B and Class C) with similar investments in the
Lehman Government/Corporate Bond Index and the S&P 500 Index by portraying
the initial account values at the commencement of operations of each class,
and subsequent account values at the end of this reporting period (July 31),
as measured on a quarterly basis, beginning in 1990 for Class A shares, in
1987 for Class B shares and in 1994 for Class C shares. For purposes of the
graphs, and unless otherwise indicated, in the accompanying tables it has been
assumed (a) that the maximum applicable front-end sales charge was deducted
from the initial $10,000 investment in Class A shares; (b) the maximum
applicable contingent deferred sales charge was deducted from the value of
the investment in Class B and Class C shares, assuming full redemption on
July 31, 1995; (c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were reinvested. Class B
shares automatically convert to Class A shares on a quarterly basis,
approximately seven years after purchase. This conversion feature is not
reflected in the graph.
The Lehman Government/Corporate Bond Index is a weighted index comprised of
public, fixed-rate, non-convertible domestic corporate debt securities that
are rated at least investment grade (BBB/Baa or higher) and public
obligations of the U.S. Treasury. The S&P 500 is a capital-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. Both the Lehman
Government/Corporate Bond Index and the S&P 500 are unmanaged-indices and
include the reinvestment of all dividends, but do not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Fund. The securities in these indices may differ substantially from the
securities in each of the Fund's portfolios. The Lehman Government/Corporate
Bond Index and the S&P 500 are not the only indices that may be used to
characterize performance of balanced funds and other indices may portray
different comparative performance.
B-4
<PAGE>
APPENDIX C
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
November 16, 1995
We are pleased to provide you with the Annual Report of The Prudential
Institutional Fund for the year ended September 30, 1995. The period was
generally characterized by bullish financial markets which, along with strong
cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $784.9 million at September 30, 1995 from $493.1 million at
September 30, 1994. The Fund has seven portfolios, each with a distinct
investment objective designed to allow shareholders the opportunity to select
various options to match different goals and risk tolerances.
ECONOMY
Gross Domestic Product grew at a rate of 3.3% this fiscal year, compared to
4.4% the last fiscal year. The Fed ended its relentless pattern of rate
increases (six hikes during 1994) and cut short-term interest rates .25% in
July, 1995. The economy appears to be moving ahead at a reasonable pace, albeit
at one that's slower than 1994.
Leading indicators have been trending sideways --housing and auto sales
remain high but are off earlier peaks and employment remains relatively stable.
Restrained growth in both wages and consumer prices have kept inflation under
control. Although inflation isn't a problem, moderate economic growth led the
Fed to shelve any plans for further interest rate cuts.
MARKET REVIEW
Returns for the U.S. stock and bond markets were lackluster toward the end of
1994. By the first quarter of 1995, the financial markets welcomed slower
economic growth and the S&P 500 Index returned nearly 10% --one of the best
quarters on record. Despite turmoil in the foreign exchange markets, bonds
rallied steadily throughout the first quarter. The surprisingly strong 1995
rally in stocks and bonds continued right through the third quarter. By the end
of September, 1995, the S&P 500 Index was up 29.7% for the fiscal year, while
the Lehman Government/Corporate Bond Index was up 14.3%.
Foreign stocks, as measured by the Morgan Stanley Europe, Australia and Far
East Index (EAFE), gained 5.8%. This relative performance is a reversal from
fiscal 1994 when the EAFE index outperformed both the S&P 500 Index and Lehman
index returns.
FUND PERFORMANCE
As a result of the strength in the financial markets, each of the Fund's
portfolios achieved absolute positive returns for the year. For the most part,
comparable benchmarks proved difficult to surpass. Since each portfolio's
inception, returns have been very positive and compare satisfactorily versus the
benchmarks. This performance information along with comments from each
portfolio's adviser and portfolio holdings may be found on the following pages.
SUMMARY
While we do not expect gains of this magnitude to be repeated in the near
future, we believe that investors who stick with a disciplined approach to
investing their retirement savings should be rewarded over the long term. We
look forward to continuing to meet the retirement and investment needs of our
shareholders.
Sincerely,
Mark R. Fetting
PRESIDENT
C-1
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to realize long-term total return consistent with moderate
portfolio risk.
INVESTMENT APPROACH: Under normal operating
parameters, the Adviser will use the following ranges, as a percentage of total
assets, for each type of security to be purchased by the Fund:
- 25%-50% will be invested in common and preferred stocks and other
equity-related securities.
- 30%-60% will be invested in investment-grade fixed income securities of
intermediate maturities.
- 0-45% will be invested in money market instruments.
ADVISER: Prudential Diversified Investment Strategies (PDI) is a business unit
of The Prudential Investment Corporation dedicated to equity index and balanced
fund investing for institutional clients. Established in 1975, PDI is among the
oldest quantitatively-oriented balanced managers in the country, currently
managing approximately $19 billion in equity, balanced and fixed income
accounts.
ADVISER'S COMMENTS: During 1994, the Federal Reserve raised short-term interest
rates six times. This relentless increase in rates had the intended effect of
slowing the economy; however, the stock market posted a small gain and the bond
market was down for the year. Fearing the Fed would repeat past mistakes by
stepping too hard on the monetary brakes, financial markets welcomed slower
economic growth in 1995. By the end of the first quarter, the return on the S&P
500 Index was one of the best on record, returning nearly 10%. Bonds also
rallied steadily throughout the quarter. By the end of June, 1995, the S&P 500
Index had returned more than 20%, while returns on bonds were the fourth best in
the last 70 years. Although growth stocks faltered during the third quarter, the
S&P 500 Index return reached almost 30% for the year. Despite a hiccup in July
and August, the yield on Treasury bonds fell to almost 6.5% --the lowest yield
since the opening weeks of 1994. The Lehman Aggregate Bond Index was up over 13%
for the year by the end of the third quarter. The Balanced Fund's allocation was
overweight in stocks (over 46% of assets) for the entire year. However, the
value stock holdings in the fund's portfolio underperformed the broader market
index (S&P 500) for the year. The underweighting in the technology and consumer
sector stocks were the primary reason for the fund's underperformance. Bonds
were slightly underweight for the year, while cash was slightly overweight.
Although we've taken some gains, we continue to favor stocks. With the economy
slowing, earnings momentum looks somewhat high. As long as earnings don't
surprise us on the downside, stocks can continue to outperform bonds if further
declines in interest rates accompany the economy's ``soft landing.''
<TABLE>
PERFORMANCE RESULTS:
<CAPTION>
Composite
Average Annual Returns Fund Index (1)
<S> <C> <C>
------------------------- ------------- ----------
One Year ended 9/30/95 +15.90% +20.42%
From Inception (11/5/92) +10.85% +10.86%
</TABLE>
Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. The Manager is currently limiting the
expenses of the Fund. Without this reduction of expenses, the total return would
have been lower.
(1) The Composite Index is a weighted average as follows: 45% S&P 500; 45%
Lehman Brothers Government/Corporate Index; 10% T-Bill return. For each of the
periods, the Fund, on average, has been invested 46% in stocks, 43% in bonds and
11% in money market instruments. The S&P 500 returned 29.74%, and 15.40%; the
Lehman Gov't/Corp Index returned 14.35%, and 7.79%, and T-Bills returned 5.80%
and 4.20% for each period, respectively.
C-2
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment
(CHART)
----- Balanced Fund . . . . S&P 500 - - - - Lehman Gov't./Corp. Index
Past performance is no guarantee of future results and an investor's
shares may be worth more or less than their original cost.
This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in The Prudential Institutional Fund:
Balanced Fund (the ``Fund'') with similar investments in the Lehman
Government/Corporate Bond Index (GCI) and the S&P 500 Index (S&P 500) by
portraying the initial account values at the commencement of operations
and subsequent account values at the end of each fiscal year (September
30) beginning in 1992. For purposes of the graph and, unless otherwise
indicated in the accompanying table, it has been assumed that all
recurring fees (including management fees) were deducted and all
dividends and distributions were reinvested.
The GCI is a weighted index comprised of public, fixed rate,
non-convertible domestic corporate debts that are rated at least
investment grade (BBB/Baa or higher) and public obligations of the U.S.
Treasury. The S&P 500 is a capital-weighted index, representing the
aggregate market value of the common equity of 500 stocks primarily
traded on the New York Stock Exchange. The GCI and the S&P 500 are
unmanaged indices and both include the reinvestment of all income, but
do not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The securities which comprise
the GCI and the S&P 500 may differ substantially from the securities in
the Fund's portfolio. The GCI and the S&P 500 are not the only indices
which may be used to characterize performance of balanced funds and
other indices may portray different comparative performance.
C-3
<PAGE>
APPENDIX D
PRUDENTIAL ALLOCATION FUND
NOMINATED SLATE OF TRUSTEES
(AS OF JULY 31, 1996)
The following is information about the nominated slate of Trustees to be
presented to Allocation Fund shareholders at a special meeting anticipated to be
held in October 1996. For information on Prudential Allocation Fund, Inc.'s
current Trustees, see the Prudential Allocation, Inc. Statement of Additional
Information, which may be obtained by calling (800) 225-1852.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE DURING PAST FIVE YEARS
- ---------------------------------- ------------------------------------------------------------------------------
<S> <C>
Edward D. Beach (71) President and Director of BMC Fund, Inc., a closed-end investment company;
c/o Prudential Mutual Fund prior thereto Vice Chairman of Broyhill Furniture Industries, Inc.; Certified
Management, Inc. Public Accountant; Secretary and Treasurer of Broyhill Family Foundation,
One Seaport Plaza Inc.; Member of the Board of Trustees of Mars Hill College; President,
New York, NY Treasurer and Director of First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.
Delayne Dedrick Gold (58) Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Donald D. Lennox (77) Chairman (since February 1990) and Director (since April 1989) of
c/o Prudential Mutual Fund International Imaging Materials, Inc.; Retired Chairman, Chief Executive
Management, Inc. Officer and Director of Schlegel Corporation (industrial manufacturing)
One Seaport Plaza (March 1987-February 1989); Director of Gleason Corporation, Personal Sound
New York, NY Technologies, Inc. and The High Yield Income Fund, Inc.
Douglas H. McCorkindale (57) Vice Chairman, Gannett Co. Inc. (publishing and media) (since March 1984);
c/o Prudential Mutual Fund Director, Continental Airlines, Inc., Gannett Co. Inc. and Frontier
Management, Inc. Corporation.
One Seaport Plaza
New York, NY
Thomas T. Mooney (54) President of the Greater Rochester Metro Chamber of Commerce; formerly
c/o Prudential Mutual Fund Rochester City Manager; Trustee of Center for Governmental Research, Inc.;
Management, Inc. Director of Blue Cross of Rochester, Monroe County Water Authority, Rochester
One Seaport Plaza Jobs, Inc., Executive Service Corps of Rochester, Monroe County Industrial
New York, NY Development Corporation, Northeast Midwest Institute, The Business Councel of
New York State, First Financial Fund, Inc. and The High Yield Plus Fund, Inc.
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE DURING PAST FIVE YEARS
- ---------------------------------- ------------------------------------------------------------------------------
<S> <C>
Stephen P. Munn (54) Chairman (since January 1994), Director and President (since 1988) and Chief
c/o Prudential Mutual Fund Executive Officer (1988-December 1993) of Carlisle Companies Incorporated.
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (53) President, Chief Executive Officer and Director (since October 1993),
One Seaport Plaza Prudential Mutual Fund Management, Inc.; Director and Member of Operating
New York, NY Committee (since October 1993), Prudential Securities Incorporated; Director
(since October 1993) of Prudential Securities Group, Inc.; Executive Vice
President (since July 1994), The Prudential Investment Corporation; Director
(since January 1994) of Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc.; formerly Senior Executive Vice
President and Director (September 1978-September 1993) of Kemper Financial
Services, Inc.; Director of The High Yield Income Fund, Inc.
Robin B. Smith (56) President (since September 1981) and Chief Executive Officer (since January
c/o Prudential Mutual Fund 1988) of Publishers Clearing House; Director of BellSouth Corporation, The
Management, Inc. Omnicom Group, Inc., Spring Industries, Inc., Texaco Inc., First Financial
One Seaport Plaza Fund, Inc., The High Yield Income Fund, Inc. and The High Yield Plus Fund,
New York, NY Inc.
Louis A. Weil, III (55) President and Chief Executive Officer (since January 1996) and Director (since
c/o Prudential Mutual Fund September 1991) of Central Newspapers, Inc.; Chairman of the Board (since
Management, Inc. January 1996), Publisher and Chief Executive Officer, (August 1991-December
One Seaport Plaza 1995) of Phoenix Newspapers, Inc.; formerly Publisher of Time Magazine (May
New York, NY 1989-March 1991); formerly President, Publisher and CEO of The Detroit News
(February 1986-August 1989); formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester.
Clay T. Whitehead (57) President, National Exchange Inc. (since May 1983).
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
- --------------
* "Interested" trustee, as defined in the Investment Company Act of 1940, by
reason of his affiliation with Prudential Securities Incorporated or
Prudential Mutual Fund Management, Inc.
The above Nominees are also trustees, directors and officers of the other
investment companies distributed by Prudential Securities Incorporated.
D-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS................................................................................................... 2
General................................................................................................ 2
The Proposed Reorganization and Liquidation............................................................ 2
Reasons for the Proposed Reorganization................................................................ 3
Structure of the Series................................................................................ 4
Investment Objectives and Policies..................................................................... 5
Certain Differences Between the Series................................................................. 6
Fees and Expenses...................................................................................... 7
Management Fees.................................................................................... 7
Distribution Fees.................................................................................. 8
Administration Fees................................................................................ 8
Other Expenses..................................................................................... 8
Expense Ratios, Fee Waivers and Subsidy............................................................ 9
Purchases and Redemptions.............................................................................. 10
Exchange Privileges.................................................................................... 11
Dividends and Other Distributions...................................................................... 11
Federal Income Tax Consequences of the Proposed Reorganization......................................... 12
PRINCIPAL RISK FACTORS..................................................................................... 12
High Yield Securities.................................................................................. 12
Foreign Investments.................................................................................... 13
Hedging and Return Enhancement Activities.............................................................. 13
Realignment of Investment Portfolio.................................................................... 14
SPECIAL MEETING OF ALLOCATION FUND SHAREHOLDERS............................................................ 14
THE PROPOSED TRANSACTION................................................................................... 14
Agreement and Plan of Reorganization and Liquidation................................................... 14
Reasons for the Reorganization......................................................................... 15
Description of Securities to be Issued................................................................. 16
Federal Income Tax Considerations...................................................................... 16
Certain Comparative Information About Allocation Fund and Institutional Fund........................... 17
Organization....................................................................................... 17
Capitalization..................................................................................... 17
Shareholder Meetings and Voting Rights............................................................. 17
Shareholder Liability.............................................................................. 18
Liability and Indemnification of Trustees.......................................................... 18
Pro Forma Capitalization and Ratios.................................................................... 19
INFORMATION ABOUT THE PORTFOLIO............................................................................ 20
INFORMATION ABOUT BALANCED FUND............................................................................ 22
MISCELLANEOUS.............................................................................................. 23
Additional Information................................................................................. 23
Legal Matters.......................................................................................... 24
Experts................................................................................................ 24
VOTING INFORMATION......................................................................................... 24
OTHER MATTERS.............................................................................................. 25
SHAREHOLDERS' PROPOSALS.................................................................................... 25
APPENDIX A--Agreement and Plan of Reorganization and Liquidation........................................... A-1
APPENDIX B--Performance Information--Allocation Fund....................................................... B-1
APPENDIX C--Performance Information--Balanced Fund......................................................... C-1
APPENDIX D--Nominated Slate of Trustees--Allocation Fund................................................... D-1
TABLE OF CONTENTS
ENCLOSURE
Prospectus of Prudential Allocation Fund--Class Z Shares dated March 1, 1996, as supplemented on
January 5, 1996, March 1, 1996 and July 1, 1996.
</TABLE>
<PAGE>
[LETTERHEAD]
August 5, 1996
Dear Plan Participant:
As announced in early June, one of the first significant actions following
the formation of the Prudential Money Management Group was the approval by the
Board of Trustees of The Prudential Institutional Fund (PIF) to combine the
seven institutional series of funds with the broader Prudential Mutual Fund
(PMF) family. Pending approval of the Board's action, as shown in the chart
below, the four largest PIF funds will continue with the same investment
objectives and portfolio managers. The three smaller funds will be combined with
similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
CURRENT FUND NEW FUND INVESTMENT PORTFOLIO MANAGERS
OBJECTIVE
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
</TABLE>
As a shareholder, you are being asked to consider the action taken by the
Board. ENCLOSED IS A COMBINED PROXY/PROSPECTUS STATEMENT DISCUSSING THE RELEVANT
FUND CONSOLIDATION IN DETAIL AND THE REASONS WHY THE BOARD BELIEVES THE
CONSOLIDATION IS IN THE BEST INTEREST OF THE SHAREHOLDERS. ALSO ENCLOSED IS THE
BALLOT CARD FOR USE IN VOTING YOUR SHARES. PLEASE INDICATE YOUR VOTE AND RETURN
IT IN THE ENVELOPE PROVIDED.
As noted on the front of the proxy, a Special Meeting of Shareholders will
be held on September 6, 1996 to approve the consolidation changes. If approved,
the changes for your particular funds will appear on your quarterly statement
following the Shareholder Meeting. No further action will be required on your
part. If you have questions regarding the consolidation, please contact any
member of your Prudential service team at 1-800-458-6333. Your Prudential team
remains committed to providing quality retirement services to help you achieve
financial security.
Sincerely,
/s/MARK R. FETTING
Enclosures
<PAGE>
[LETTERHEAD]
August 5, 1996
Dear Pru-DC Client:
As announced in early June, one of the first significant actions following
the formation of the Prudential Money Management Group was the approval by the
Board of Trustees of The Prudential Institutional Fund (PIF) to combine the
seven institutional series of funds with the broader Prudential Mutual Fund
(PMF) family. Pending approval of the Board's action, as shown in the chart
below, the four largest PIF funds will continue with the same investment
objectives and portfolio managers. The three smaller funds will be combined with
similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
CURRENT FUND NEW FUND INVESTMENT PORTFOLIO MANAGERS
OBJECTIVE
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
</TABLE>
As a shareholder, you are being asked to consider the action taken by the
Board. ENCLOSED IS A COMBINED PROXY/PROSPECTUS STATEMENT DISCUSSING THE RELEVANT
FUND CONSOLIDATION IN DETAIL AND THE REASONS WHY THE BOARD BELIEVES THE
CONSOLIDATION IS IN THE BEST INTEREST OF THE SHAREHOLDERS. ALSO ENCLOSED IS THE
BALLOT CARD FOR USE IN VOTING YOUR SHARES. PLEASE INDICATE YOUR VOTE AND RETURN
IT IN THE ENVELOPE PROVIDED.
As noted on the front of the proxy, a Special Meeting of Shareholders will
be held on September 6, 1996 to approve the consolidation changes. If approved,
the changes for your particular funds will appear on your quarterly statement
following the Shareholder Meeting. No further action will be required on your
part. If you have questions regarding the consolidation, please contact any
member of your Prudential service team. We remain committed to providing quality
retirement services to help you achieve financial security.
Sincerely,
/s/MARK R. FETTING
Enclosures
<PAGE>
[LETTERHEAD]
August 5, 1996
Dear Pru-DC Client:
As announced in early June, one of the first significant actions following
the formation of the Prudential Money Management Group was the approval by the
Board of Trustees of The Prudential Institutional Fund (PIF) to combine the
seven institutional series of funds with the broader Prudential Mutual Fund
(PMF) family. Pending approval of the Board's action, as shown in the chart
below, the four largest PIF funds will continue with the same investment
objectives and portfolio managers. The three smaller funds will be combined with
similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
CURRENT FUND NEW FUND INVESTMENT PORTFOLIO MANAGERS
OBJECTIVE
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
</TABLE>
As a shareholder, you are being asked to consider the action taken by the
Board. ENCLOSED IS A COMBINED PROXY/PROSPECTUS STATEMENT DISCUSSING THE RELEVANT
FUND CONSOLIDATION IN DETAIL AND THE REASONS WHY THE BOARD BELIEVES THE
CONSOLIDATION IS IN THE BEST INTEREST OF THE SHAREHOLDERS. ALSO ENCLOSED IS THE
BALLOT CARD FOR USE IN VOTING YOUR SHARES. PLEASE INDICATE YOUR VOTE AND RETURN
IT IN THE ENVELOPE PROVIDED.
As noted on the front of the proxy, a Special Meeting of Shareholders will
be held on September 6, 1996 to approve the consolidation changes. If approved,
the changes will appear on quarterly statements following the Shareholder
Meeting. No further action will be required on your part. If you have questions
regarding the consolidation, please contact any member of your Prudential
service team. We remain committed to providing quality retirement services to
help you and your participants achieve financial security.
Sincerely,
/s/MARK R. FETTING
Enclosures
<PAGE>
[LETTERHEAD]
August 5, 1996
Dear Plan Participant:
As announced in early June, one of the first significant actions following
the formation of the Prudential Money Management Group was the approval by the
Board of Trustees of The Prudential Institutional Fund (PIF) to combine the
seven institutional series of funds with the broader Prudential Mutual Fund
(PMF) family. Pending approval of the Board's action, as shown in the chart
below, the four largest PIF funds will continue with the same investment
objectives and portfolio managers. The three smaller funds will be combined with
similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
CURRENT FUND NEW FUND INVESTMENT PORTFOLIO MANAGERS
OBJECTIVE
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
</TABLE>
As a shareholder, you are being asked to consider the action taken by the
Board. ENCLOSED IS A COMBINED PROXY/PROSPECTUS STATEMENT DISCUSSING THE RELEVANT
FUND CONSOLIDATION IN DETAIL AND THE REASONS WHY THE BOARD BELIEVES THE
CONSOLIDATION IS IN THE BEST INTEREST OF THE SHAREHOLDERS. ALSO ENCLOSED IS THE
BALLOT CARD FOR USE IN VOTING YOUR SHARES. PLEASE INDICATE YOUR VOTE AND RETURN
IT IN THE ENVELOPE PROVIDED.
As noted on the front of the proxy, a Special Meeting of Shareholders will
be held on September 6, 1996 to approve the consolidation changes. If approved,
the changes for your particular funds will appear on your quarterly statement
following the Shareholder Meeting. No further action will be required on your
part. If you have questions regarding the consolidation, please contact any
member of your Prudential service team at 1-800-562-8838. Your Prudential team
remains committed to providing quality retirement services to help you achieve
financial security.
Sincerely,
/s/MARK R. FETTING
Enclosures
<PAGE>
[LETTERHEAD]
August 5, 1996
Dear Plan Participant:
As announced in early June, one of the first significant actions following
the formation of the Prudential Money Management Group was the approval by the
Board of Trustees of The Prudential Institutional Fund (PIF) to combine each of
the series of fund with the broader Prudential Mutual Fund (PMF) family. Pending
approval of the Board's action, as shown in the chart below, the four largest
PIF funds will continue with the same investment objectives and portfolio
managers. The remaining funds will be combined with similar, but not identical,
PMF funds.
<TABLE>
<CAPTION>
CURRENT FUND NEW FUND INVESTMENT PORTFOLIO MANAGERS
OBJECTIVE
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
</TABLE>
As a shareholder, you are being asked to consider the action taken by the
Board. ENCLOSED IS A COMBINED PROXY/PROSPECTUS STATEMENT DISCUSSING THE RELEVANT
FUND CONSOLIDATION IN DETAIL AND THE REASONS WHY THE BOARD BELIEVES THE
CONSOLIDATION IS IN THE BEST INTEREST OF THE SHAREHOLDERS. ALSO ENCLOSED IS THE
BALLOT CARD FOR USE IN VOTING YOUR SHARES. PLEASE INDICATE YOUR VOTE AND RETURN
IT IN THE ENVELOPE PROVIDED.
As noted on the front of the proxy, a Special Meeting of Shareholders will
be held on September 6, 1996 to approve the consolidation changes. If approved,
the changes for your particular funds will appear on your quarterly statement
following the Shareholder Meeting. No further action will be required on your
part. If you have questions regarding the consolidation, please contact any
member of your Prudential service team at 1-800-458-6333. Your Prudential team
remains committed to providing quality retirement services to help you achieve
financial security.
Sincerely,
/s/MARK R. FETTIING
Enclosures
<PAGE>
PRUDENTIAL MUTUAL FUNDS
Supplement dated July 1, 1996
The following information supplements the prospectuses of each of the Funds
listed below.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
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(bX7) 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
250 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
record keeping (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 AND SMARTPATH PLANS. Class A shares may be purchased at NAV by
certain savings, 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 Prudential's
PruArray or SmartPath Programs (benefit plan record keeping services)
(hereafter referred to as a PruArray or SmartPath Plan); provided that the
plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock
issued by a PruArray or SmartPath 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 or SmartPath 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 or SmartPath 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) officers and current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund), (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
<PAGE>
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 180 days of the
commencement of the financial adviser's employment at Prudential Securities,
or within one year in the case of Benefit Plans, (ii) the purchase is made
with proceeds of a redemption of shares of any open-end fund sponsored by the
financial adviser's previous employer (other than a money market fund or
other no-load 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 purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
Listed below are the names of the Prudential Mutual Funds and the dates of
the prospectuses to which this supplement relates.
NAME OF FUND PROSPECTUS DATE
------------ ---------------
The BlackRock Government Income Trust August 31, 1995
The Global Government Plus Fund, Inc. January 15, 1996
The Global Total Return Fund, Inc. January 15, 1996
Global Utility Fund, Inc. November 29, 1995
Nicholas-Applegate Fund, Inc. March 4, 1996
Prudential Allocation Fund September 29, 1995
Prudential Diversified Bond Fund, Inc. April 26, 1996
Prudential Distressed Securities Fund, Inc. March 25, 1996
Prudential Equity Fund, Inc. March 1, 1996
Prudential Equity Income Fund January 2, 1996
Prudential Europe Growth Fund, Inc. June 30, 1995
Prudential Global Fund, Inc. January 2, 1996
Prudential Global Genesis Fund, Inc. July 31, 1995
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio February 26, 1996
Prudential Global Natural Resources Fund, Inc. July 31, 1995
Prudential Government Income Fund, Inc. April 30, 1996
Prudential High Yield Fund, Inc. March 1, 1996
Prudential Intermediate Global Income Fund, Inc. March 1, 1996
Prudential Jennison Fund, Inc. October 27, 1995
Prudential Mortgage Income Fund, Inc. April 29, 1996
Prudential Pacific Growth Fund, Inc. January 2, 1996
Prudential Small Companies Fund, Inc. November 29, 1995
(Formerly Prudential Growth Opportunity Fund, Inc.)
Prudential Structured Maturity Fund, Inc. March 1, 1996
Prudential Utility Fund, Inc. March 1, 1996
<PAGE>
PRUDENTIAL ALLOCATION FUND
SUPPLEMENT DATED MARCH 1, 1996 TO
PROSPECTUS DATED SEPTEMBER 29, 1995
THE FOLLOWING INFORMATION SUPPLEMENTS "GENERAL INFORMATION--DESCRIPTION OF
SHARES" IN THE PROSPECTUS:
The Fund is authorized to offer an unlimited number of shares of beneficial
interest, $.01 par value per share, of separate series or portfolios, one of
which is the Balanced Portfolio which is divided into four classes of shares,
designated Class A, Class B, Class C and Class Z shares. Each class represents
an interest in the same assets of the Portfolio and is identical in all respects
except that (i) each class is subject to different sales charges and
distribution and/or service fees which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to participants in the PSI 401(k) Plan, an employee benefit
plan sponsored by Prudential Securities. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the liquidation
proceeds to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fee. In accordance with the Fund's Declaration of
Trust, the Trustees may authorized the creation of additional series and classes
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine. Currently, the Balanced
Portfolio is offering four classes, designated Class A, Class B, Class C and
Class Z shares, and the Strategy Portfolio is offering three classes, designated
Class A, Class B and Class C shares.
THE FOLLOWING INFORMATION FOR THE CLASS Z SHARES SUPPLEMENTS "HOW THE FUND
CALCULATES PERFORMANCE" IN THE PROSPECTUS:
The Fund will include performance data for each class of shares of a
Portfolio offered through the Prospectus in any advertisement or information
including performance data of the Portfolio.
<PAGE>
[LOGO]
Supplement dated January 5, 1996
The following information supplements the Prospectus of each of the
Funds listed below.
SHAREHOLDER GUIDE
HOW TO BY SHARES OF THE FUND
REDUCTION AND WAIVER OF INITIAL SALES CHARGES.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (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 advisor who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money
market fund or other no-load 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 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.
<PAGE>
Listed below are the names of the Prudential Mutual Funds and the dates of
the Prospectuses to which this supplement relates.
NAME OF FUND PROSPECTUS DATE
- ------------ ---------------
The BlackRock Government Income Trust August 31, 1995
Global Utility Fund, Inc. November 29, 1995
Nicholas-Applegate Fund, Inc. March 6, 1995
Nicholas-Applegate Growth Equity Fund
Prudential Allocation Fund September 29, 1995
Balanced Portfolio
Strategy Portfolio
Prudential California Municipal Fund
California Income Series November 1, 1995
California Series November 1, 1995
Prudential Diversified Bond Fund, Inc. January 3, 1995
(As supplemented on
June 20, 1995)
Prudential Equity Fund, Inc. February 28, 1995
Prudential Equity Income Fund January 2, 1996
Prudential Europe Growth Fund, Inc. June 30, 1995
Prudential Global Genesis Fund, Inc. July 31, 1995
Prudential Global Natural Resources Fund, Inc. July 31, 1995
Prudential Government Income Fund, Inc. May 1, 1995
Prudential Growth Opportunity Fund, Inc. November 29, 1995
Prudential High Yield Fund, Inc. February 28, 1995
Prudential Intermediate Global Income Fund, Inc. March 2, 1995
Prudential Jennison Fund, Inc. October 27, 1995
Prudential Mortgage Income Fund, Inc. August 25, 1995
Prudential Multi-Sector Fund, Inc. June 30, 1995
Prudential Municipal Bond Fund June 30, 1995
Insured Series
High Yield Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series November 1, 1995
Hawaii Income Series November 1, 1995
Maryland Series November 1, 1995
Massachusetts Series November 1, 1995
Michigan Series November 1, 1995
New Jersey Series November 1, 1995
New York Series November 1, 1995
North Carolina Series November 1, 1995
Ohio Series November 1, 1995
Pennsylvania Series November 1, 1995
Prudential National Municipals Fund, Inc. February 28, 1995
Prudential Structured Maturity Fund, Inc. March 1, 1995
Income Portfolio
Prudential Utility Fund, Inc. March 1, 1995
<PAGE>
Prudential Allocation Fund
(Class Z Shares)
- ----------------------------------------------------
PROSPECTUS DATED MARCH 1, 1996
- ----------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Class Z shares are offered by the Balanced Portfolio exclusively for sale to
participants in the PSI 401(k) Plan, an employee benefit plan sponsored by
Prudential Securities Incorporated (the PSI 401(k) Plan or the Plan). Only Class
Z shares are offered through this Prospectus. The Fund also offers Class A,
Class B and Class C shares through the attached Prospectus dated September 29,
1995 (the Retail Class Prospectus), which is a part hereof.
- --------------------------------------------------------------------------------
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 to be 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 EXPENSES
(BALANCED PORTFOLIO)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS Z SHARES
--------------
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... None
<S> <C>
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends........ None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).......... None
Redemption Fees.......................... None
Exchange Fee............................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES* CLASS Z SHARES
(as a percentage of average net assets) --------------
<S> <C>
Management Fees.......................... .65%
12b-1 Fees............................... None
Other Expenses........................... .32
---
Total Fund Operating Expenses............ .97%
---
---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming: (1) 5% annual return and (2)
redemption at the end of each time period:
Class Z................................................ $10 $31 $54 $119
The above example is based on expenses expected to have been incurred if Class Z shares had been in
existence throughout the fiscal year ended July 31, 1995. THE EXAMPLE 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 Class Z shares of the Balanced Portfolio 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 Portfolio, such as Trustees' and professional fees, registration fees,
reports to shareholders and transfer agency and custodian fees.
<FN>
- ------------
* Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended July 31,
1995.
</TABLE>
2
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR" IN
THE RETAIL CLASS PROSPECTUS:
Prudential Securities serves as the Distributor of Class Z shares and incurs
the expenses of distributing the Class Z shares under a Distribution Agreement
with the Fund, none of which is reimbursed by or paid for by the Fund.
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND VALUES ITS SHARES" IN THE
RETAIL CLASS PROSPECTUS:
The NAV of Class Z shares will generally be higher than the NAV of Class A,
Class B or Class C shares as a result of the fact that the Class Z shares are
not subject to any distribution and/or service fee. It is expected, however,
that the NAV of the four classes 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.
THE FOLLOWING INFORMATION SUPPLEMENTS "TAXES, DIVIDENDS AND
DISTRIBUTIONS--TAXATION OF SHAREHOLDERS" IN THE RETAIL CLASS PROSPECTUS:
As a qualified plan, the PSI 401(k) Plan generally pays no federal income tax.
Individual participants in the Plan should consult Plan documents and their own
tax advisers for information on the tax consequences associated with
participating in the PSI 401(k) Plan.
The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, Class B or Class C shares as a result of the
fact that Class Z shares are not subject to any distribution or service fee.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION UNDER "SHAREHOLDER GUIDE--HOW
TO BUY SHARES OF THE FUND" AND "SHAREHOLDER GUIDE-- HOW TO SELL YOUR SHARES" IN
THE RETAIL CLASS PROSPECTUS:
Class Z shares are offered exclusively for sale by the Balanced Portfolio to
participants in the PSI 401(k) Plan. Such shares may be purchased or redeemed
only by the Plan on behalf of individual Plan participants at NAV without any
sales or redemption charge. Class Z shares are not subject to any minimum
investment requirements. The Plan purchases and redeems shares to implement the
investment choices of individual Plan participants with respect to contributions
in the Plan. All purchases through the Plan will be for Class Z shares.
Effective as of March 1, 1996, Class A shares of the Balanced Portfolio held
through the PSI 401(k) Plan on behalf of participants will be automatically
exchanged for Class Z shares. Individual Plan participants should contact the
Prudential Securities Benefits Department for information on making or changing
investment choices. The Prudential Securities Benefits Department is located at
One Seaport Plaza, 33rd Floor, New York, New York 10292 and may be reached by
calling (212) 214-7194.
The average net asset value per share at which shares of the Balanced
Portfolio are purchased or redeemed by the Plan for the accounts of individual
Plan participants might be more or less than the net asset value per share
prevailing at the time that such participants made their investment choices or
made their contributions to the Plan.
THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO EXCHANGE YOUR
SHARES" IN THE RETAIL CLASS PROSPECTUS:
Class Z shareholders of the Balanced Portfolio may exchange their Class Z
shares for Class Z shares of certain other Prudential Mutual Funds on the basis
of the relative net asset value. You should contact the Prudential Securities
Benefits Department about how to exchange your Class Z shares. See "How to Buy
Shares of the Fund" above. Participants who wish to transfer their Class Z
shares out of the PSI 401(k) Plan following separation from service (I.E.,
voluntary or involuntary termination of employment or retirement) will have
their Class Z shares exchanged for Class A shares at net asset value.
THE INFORMATION ABOVE ALSO SUPPLEMENTS THE INFORMATION UNDER "FUND HIGHLIGHTS"
IN THE RETAIL CLASS PROSPECTUS AS APPROPRIATE.
3
<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 66 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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.......................................... .32 .32 .39 .43 .43 .45
--- --- --- --- --- ---
Total Fund Operating Expenses........................... 1.22% 1.97% 2.04% 1.33% 2.08% 2.10%
--- --- --- --- --- ---
--- --- --- --- --- ---
</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........................................................ $ 62 $ 87 $114 $190
Class B........................................................ $ 70 $ 92 $116 $201
Class C........................................................ $ 31 $ 64 $110 $237
You would pay the following expenses on the same investment,
assuming no redemption:
Class A........................................................ $ 62 $ 87 $114 $190
Class B........................................................ $ 20 $ 62 $106 $201
Class C........................................................ $ 21 $ 64 $110 $237
</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.................................................................. $ 63 $ 90 $119 $202
Class B.................................................................. $ 71 $ 95 $122 $213
Class C.................................................................. $ 31 $ 66 $113 $243
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................. $ 63 $ 90 $119 $202
Class B.................................................................. $ 21 $ 65 $112 $213
Class C.................................................................. $ 21 $ 66 $113 $243
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 1.27% and
1.38% 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 (D)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
JANUARY
22,
1990 (A)
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............................... $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23 $ 9.83
-------- ------- ------- ------- ------ --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. .34 .33 .43 .44 .44 .26
Net realized and unrealized gain
(loss) on investment transactions.... 1.11 (.05) 1.16 .81 .73 .38
-------- ------- ------- ------- ------ --------
Total from investment operations.... 1.45 .28 1.59 1.25 1.17 .64
-------- ------- ------- ------- ------ --------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.33) (.37) (.37) (.44) (.44) (.24)
Distributions paid to shareholders
from net realized gains on investment
transactions......................... (.20) (.54) (.47) (.54) (.23) --
-------- ------- ------- ------- ------ --------
Total distributions................. (.53) (.91) (.84) (.98) (.67) (.24)
-------- ------- ------- ------- ------ --------
Net asset value, end of period........ $ 12.04 $ 11.12 $ 11.75 $ 11.00 $10.73 $10.23
-------- ------- ------- ------- ------ --------
-------- ------- ------- ------- ------ --------
TOTAL RETURN (C):..................... 13.67% 2.39% 15.15% 12.29% 11.99% 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $119,829 $37,512 $22,605 $10,944 $4,408 $1,944
Average net assets (000).............. $ 69,754 $29,875 $15,392 $ 7,103 $2,747 $1,047
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.22% 1.23% 1.17% 1.29% 1.38% 1.29%(b)
Expenses, excluding distribution
fees............................... .97% 1.00% .97% 1.09% 1.18% 1.09%(b)
Net investment income............... 2.90% 2.84% 3.88% 3.97% 4.44% 5.04%(b)
Portfolio turnover rate............... 201% 108% 83% 105% 137% 106%
<FN>
- ----------------------------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) 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.
(d) Prior to September 29, 1995, the Balanced Portfolio was called the
Conservatively Managed Portfolio.
</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 (G)
<TABLE>
<CAPTION>
CLASS C
CLASS B -------
-------------------------------------------------------------------------------------- AUGUST
SEPTEMBER 1,
15, 1994(C)
1987(A) THROUGH
YEAR ENDED JULY 31, THROUGH JULY
-------------------------------------------------------------------------- JULY 31, 31,
1995 1994 1993 1992 1991 1990 1989 1988(B) 1995
-------- -------- -------- -------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43 $ 10.00 $11.12
-------- -------- -------- -------- -------- -------- -------- --------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .26 .24 .34 .35 .36 .45 .52 .32 .21
Net realized and
unrealized gain (loss)
on investment
transactions............ 1.10 (.05) 1.16 .82 .73 .18 .73 (.62) 1.12
-------- -------- -------- -------- -------- -------- -------- --------- -------
Total from investment
operations............ 1.36 .19 1.50 1.17 1.09 .63 1.25 (.30) 1.33
-------- -------- -------- -------- -------- -------- -------- --------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.25) (.28) (.29) (.36) (.37) (.52) (.47) (.25) (.25)
Distributions paid to
shareholders from net
realized gains on
investment
transactions............ (.20) (.54) (.47) (.54) (.23) (.10) -- (.02) (.20)
-------- -------- -------- -------- -------- -------- -------- --------- -------
Total distributions.... (.45) (.82) (.76) (.90) (.60) (.62) (.47) (.27) (.45)
-------- -------- -------- -------- -------- -------- -------- --------- -------
Net asset value, end of
period.................. $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43 $12.00
-------- -------- -------- -------- -------- -------- -------- --------- -------
-------- -------- -------- -------- -------- -------- -------- --------- -------
TOTAL RETURN (E):........ 12.79% 1.61% 14.27% 11.48% 11.13% 6.44% 13.73% (2.95)% 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $392,291 $445,609 $321,831 $225,995 $162,281 $154,917 $132,631 $149,472 $3,046
Average net assets
(000)................... $409,419 $392,133 $267,340 $189,358 $149,907 $143,241 $139,009 $113,774 $ 920
Ratios to average net
assets: (f)
Expenses, including
distribution fees..... 1.97% 2.00% 1.97% 2.09% 2.16% 2.07% 2.09% 2.08%(d) 2.04%(d)
Expenses, excluding
distribution fees..... .97% 1.00% .97% 1.09% 1.16% 1.08% 1.08% 1.11%(d) 1.04%(d)
Net investment
income................ 2.34% 2.08% 3.04% 3.25% 3.55% 4.42% 5.47% 4.22%(d) 2.20%(d)
Portfolio turnover
rate.................... 201% 108% 83% 105% 137% 106% 137% 112% 201%
<FN>
- ----------------------------------
(a) Commencement of offering of Class B shares.
(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(c) Commencement of offering of Class C shares.
(d) Annualized.
(e) 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.
(f) 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.
(g) Prior to September 29, 1995, the Balanced Portfolio was called the
Conservatively Managed Portfolio.
</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(A)
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....................... $ 11.60 $ 11.82 $ 12.03 $ 11.45 $ 10.50 $10.16
--------- --------- -------- -------- ---------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .38 .30 .42 .35 .38 .25
Net realized and unrealized
gain on investment and
foreign currency
transactions................. 1.14 .05 .70 1.02 .98 .33
--------- --------- -------- -------- ---------- --------
Total from investment
operations................. 1.52 .35 1.12 1.37 1.36 .58
--------- --------- -------- -------- ---------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.30) (.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......... (.64) (.57) (1.33) (.79) (.41) (.24)
--------- --------- -------- -------- ---------- --------
Net asset value, end of
period....................... $ 12.48 $ 11.60 $ 11.82 $ 12.03 $ 11.45 $10.50
--------- --------- -------- -------- ---------- --------
--------- --------- -------- -------- ---------- --------
TOTAL RETURN(C):.............. 13.95% 2.88% 10.02% 12.36% 13.42% 5.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 87,081 $ 32,485 $ 28,641 $ 20,378 $ 10,765 $5,073
Average net assets (000)...... $ 57,020 $ 30,634 $ 24,216 $ 15,705 $ 6,694 $2,928
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.33% 1.26% 1.21% 1.26% 1.33% 1.51%(b)
Expenses, excluding
distribution fees.......... 1.08% 1.03% 1.01% 1.06% 1.13% 1.26%(b)
Net investment income....... 3.34% 2.52% 3.61% 3.05% 3.89% 4.58%(b)
Portfolio turnover rate....... 180% 96% 145% 241% 189% 159%
<FN>
- ----------------------------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) 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
------------------------------------------------------------------------------ CLASS C
SEPTEMBER ----------
15, AUGUST 1,
1987 (A) 1994 (C)
YEAR ENDED JULY 31, THROUGH THROUGH
---------------------------------------------------------------- JULY 31, JULY 31,
1995 1994 1993 1992 1991 1990 1989 1988 (B) 1995
------- ------- ------- ------- ------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 10.85 $ 9.52 $10.00 $11.57
------- ------- ------- ------- ------- ------- ---------- --------- ----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .20 .21 .34 .26 .30 .37 .42(g) .23(g) .25
Net realized and
unrealized gain on
investment and
foreign currency
transactions...... 1.22 .05 .70 1.02 .97 .03 1.30 (.53) 1.14
------- ------- ------- ------- ------- ------- ---------- --------- ----------
Total from
investment
operations...... 1.42 .26 1.04 1.28 1.27 .40 1.72 (.30) 1.39
------- ------- ------- ------- ------- ------- ---------- --------- ----------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.21) (.16) (.30) (.28) (.27) (.40) (.39) (.18) (.21)
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) -- -- (.34)
------- ------- ------- ------- ------- ------- ---------- --------- ----------
Total
distributions.... (.55) (.51) (1.26) (.70) (.33) (.76) (.39) (.18) (.55)
------- ------- ------- ------- ------- ------- ---------- --------- ----------
Net asset value,
end of period..... $ 12.41 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $10.85 $9.52 $12.41
------- ------- ------- ------- ------- ------- ---------- --------- ----------
------- ------- ------- ------- ------- ------- ---------- --------- ----------
TOTAL RETURN
(E):.............. 13.05% 2.11% 9.21% 11.53% 12.49% 3.59% 18.53% (2.92)% 12.75%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $278,714 $351,140 $357,287 $314,771 $219,983 $176,078 $62,651 $55,671 $ 289
Average net assets
(000)............. $307,439 $362,579 $339,225 $267,525 $190,913 $127,360 $57,326 $44,717 $ 170
Ratios to average
net assets:(f)
Expenses,
including
distribution
fees............ 2.08% 2.03% 2.01% 2.06% 2.11% 2.10% 2.33%(g) 2.40%(g)/(d) 2.10%(d)
Expenses,
excluding
distribution
fees............ 1.08% 1.03% 1.01% 1.06% 1.11% 1.14% 1.34%(g) 1.43%(g)/(d) 1.10%(d)
Net investment
income.......... 1.77% 1.77% 2.79% 2.27% 2.95% 3.61% 4.26%(g) 3.13%(g)/(d) 2.27%(d)
Portfolio turnover
rate.............. 180% 96% 145% 241% 189% 159% 132% 93% 180%
<FN>
- ----------------------------------
(a) Commencement of offering of Class B shares.
(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(c) Commencement of offering of Class C shares.
(d) Annualized.
(e) 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.
(f) 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.
(g) Net of expense subsidy or reimbursement.
</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 invest under normal circumstances 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. Under normal circumstances, 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." The Portfolio will not invest more than 35% of its net assets in "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
11
<PAGE>
pool. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When the
mortgage obligations are prepaid, the Portfolio reinvests the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time.
Therefore, the Portfolio's ability to maintain a portfolio containing high-
yielding mortgage-backed securities will be adversely affected to the extent
that prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
THE PORTFOLIO MAY ALSO INVEST IN ASSET-BACKED SECURITIES. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the collateralized mortgage
structure. The Portfolio may invest in these and other types of asset-backed
securities that may be developed in the future. Asset-backed securities present
certain risks that are not presented by mortgage-backed securities. Primarily,
these securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and debtors
are entitled to the protection of a number of state and federal consumer credit
laws, some of which may reduce the ability to obtain full payment. In the case
of automobile receivables, the security interests in the underlying automobiles
are often not transferred when the pool is created, with the resulting
possibility that the collateral could be resold. In general, these types of
loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.
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
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(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." The Portfolio will not invest more than 35% of
its net assets in "junk bonds." See "Investment Policies Applicable to All
Portfolios -- Risks of Investing in High Yield Securities" below.
THE PORTFOLIO MAY INVEST IN OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS
AGENCIES AND INSTRUMENTALITIES AND IN ASSET-BACKED SECURITIES. See "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 corporate 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 dependent upon a market price advance in the
convertible security's underlying common stock. Convertible securities also
include preferred stock which is technically an equity 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.
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dollar denominated bonds issued by foreign companies in the United States) and
global bonds which are U.S. dollar denominated are not deemed to be foreign
securities. In many instances, foreign securities may provide higher yields but
may be subject to greater fluctuations in price than securities of domestic
issuers which have similar maturities or quality.
INVESTING IN SECURITIES OF FOREIGN COMPANIES AND COUNTRIES INVOLVES CERTAIN
CONSIDERATIONS AND RISKS WHICH ARE NOT TYPICALLY ASSOCIATED WITH INVESTING IN
U.S. GOVERNMENT SECURITIES AND SECURITIES OF DOMESTIC COMPANIES. There may be
less publicly available information about a foreign issuer than a domestic one,
and foreign companies are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than exists in the
United States. Interest and dividends paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on such
investments as compared to dividends and interest paid to the Portfolio by
domestic companies or the U.S. Government. There may be the possibility of
expropriations, seizure or nationalization of foreign deposits, confiscatory
taxation, political, economic or social instability or diplomatic developments
which could affect assets of the Portfolio held in foreign countries. Finally,
the establishment of exchange controls or other foreign governmental laws or
restrictions could adversely affect the payment of obligations.
To the extent a Portfolio's currency exchange transactions do not fully
protect the Portfolio against adverse changes in currency exchange rates,
decreases in the value of currencies of the foreign countries in which the
Portfolio will invest relative to the U.S. dollar will result in a corresponding
decrease in the U.S. dollar value of the Portfolio's assets denominated in those
currencies (and possibly a corresponding increase in the amount of securities
required to be liquidated to meet distribution requirements). Conversely,
increases in the value of currencies of the foreign countries in which a
Portfolio invests relative to the U.S. dollar will result in a corresponding
increase in the U.S. dollar value of the Portfolio's assets (and possibly a
corresponding decrease in the amount of securities to be liquidated).
There may be less publicly available information about foreign companies and
governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than the New York
Stock Exchange 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.
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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.
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
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purchase or sell currency. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract.
EACH PORTFOLIO'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency (cross hedge). Although there are no limits on the
number of forward contracts which a Portfolio may enter into, a Portfolio may
not position hedge with respect to a particular currency for an amount greater
than the aggregate market value (determined at the time of making any sale of
forward currency) of the securities held in its portfolio denominated or quoted
in, or currently convertible into, such currency.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH PORTFOLIO MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, 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 AND OPTIONS THEREON, THE VALUE OF ALL
FUTURES CONTRACTS AND OPTIONS THEREON 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
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skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences; and (6) the
possible inability of a Portfolio to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
a Portfolio to sell a portfolio security at a disadvantageous time, due to the
need for a Portfolio to maintain "cover" or to segregate securities in
connection with hedging transactions. See "Taxes" and "Investment Objectives and
Policies" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Portfolio with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
transaction. The Fund's Custodian will maintain, in a segregated account of the
Fund, cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the Fund's purchase
commitments; the Custodian will likewise segregate securities sold on a delayed
delivery basis. The securities so purchased are subject to market fluctuation
and no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities, the value may be more or
less than the purchase price and an increase in the percentage of the
Portfolio's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Portfolio's net asset
value.
SHORT SALES AGAINST-THE-BOX
The Portfolios may make short sales of securities or maintain a short
position, provided that at all times when a short position is open, the
Portfolio owns an equal amount of such securities or securities convertible into
or exchangeable for, with or without payment of any further consideration, such
securities; provided that if further consideration is required in connection
with the conversion or exchange, cash or U.S. Government securities in an amount
equal to such consideration must be put in a 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.
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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 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. Neither Portfolio will purchase
portfolio securities if its borrowings exceed 5% of its net assets.
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 1.22%, 1.97% and
2.04% (annualized) of the Class A, Class B and Class C shares, respectively, of
the Balanced Portfolio and were 1.33%, 2.08% and 2.10% (annualized) of the Class
A, Class B and Class C shares, respectively, of the Strategy 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 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 28 closed-end investment companies with aggregate assets of
approximately $51 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
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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.
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."
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For the fiscal year ended July 31, 1995, the Fund paid distribution expenses
of .25%, 1.00% and 1.00% (annualized) 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 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.
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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
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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
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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 THREE BUSINESS
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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.
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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:
27
<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.
29
<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 such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of 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
30
<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.
31
<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.
32
<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
33
<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.
35
<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
Short-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
Intermediate 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 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...................................................... 15
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>
THE PRUDENTIAL INSTITUTIONAL FUND
BALANCED FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned hereby appoints S. Jane Rose, Marguerite E. H. Morrison and
Eugene S. Stark as Proxies, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of The Prudential Institutional Fund--Balanced Fund, held of record by
the undersigned on July 12, 1996, at the Special Meeting of Shareholders to be
held on September 6, 1996 or any adjournment thereof.
Please indicate your voting instructions on the reverse and sign and return this
proxy as indicated.
<PAGE>
Please indicate your vote by an "X" in the appropriate box below.
The Board of Trustees recommends a vote "FOR" the following proposal
1. Approval of the Agreement and Plan of Reorganization and Liquidation.
FOR / / AGAINST / / ABSTAIN / /
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please mark, sign, date, and return the proxy card promptly, using the
enclosed envelope.
This proxy when executed will be voted in the manner described herein by
the undersigned shareholder. If executed and no direction is made, this proxy
will be voted FOR Proposal 1.
This proxy will not be voted unless it is dated and signed exactly as instructed
below.
-----------------------------------
Signature
-----------------------------------
Signature
Date , 1996
------------------------
If shares are held jointly, each shareholder named should sign. If the shares
are held in trust, the Trustee should sign his or her name and indicate that
he or she is signing as Trustee. If the share holder is a corporation, the
President or Vice President should sign in his or her own name, indicating
title. If the shareholder is a partnership, a partner should sign in his or
her own name, indicating that he or she is a "Partner."
<PAGE>
PRUDENTIAL ALLOCATION FUND--BALANCED PORTFOLIO
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 31, 1996
ACQUISITION OF ASSETS OF
THE PRUDENTIAL INSTITUTIONAL FUND--BALANCED FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
------------------------
BY AND IN EXCHANGE FOR CLASS Z SHARES OF
THE BALANCED PORTFOLIO OF PRUDENTIAL ALLOCATION FUND
This Statement of Additional Information specifically relates to the proposed
transfer of all of the assets and the assumption of all of the liabilities, if
any, of Balanced Fund (Balanced Fund), a portfolio of The Prudential
Institutional Fund (Institutional Fund), by Balanced Portfolio, a portfolio of
Prudential Allocation Fund (Allocation Fund). This Statement of Additional
Information consists of this cover page and the following described documents,
each of which is attached hereto and incorporated herein by reference:
1. Pro Forma Financial Statements as of and at January 31, 1996;
2. The Statement of Additional Information of Allocation Fund dated
September 29, 1995, as supplemented by supplements dated September 29,
1995, March 1, 1996 and April 22, 1996;
3. The Semi-Annual Report to Shareholders of Allocation Fund for the six
months ended January 31, 1996 as it relates to Balanced Portfolio;
4. Pages 1, 27, 28, 29, 30, 31, 32, 33, 43, 44, 46, 49, 51, 52, 53, 54, 55,
56, 57, 58 and 59 of the Annual Report to Shareholders of the
Institutional Fund relating to Balanced Fund for the fiscal year ended
September 30, 1995; and
5. Pages 1, 2, 24, 25, 26, 27, 28, 29, 37, 38, 40, 43, 45, 46, 47, 48, 49,
50 and 51 of the Semi-Annual Report to Shareholders of the Institutional
Fund relating to Balanced Fund for the six months ended March 31, 1996.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated July 31,
1996, relating to the above-referenced matter. A copy of the Prospectus and
Proxy Statement may be obtained from Allocation Fund without charge by writing
or calling Allocation Fund at the address or phone number listed above.
1
<PAGE>
PRO FORMA
FINANCIAL STATEMENTS
The following are pro forma financial statements that give effect to the
proposed transaction whereby all of the assets of Balanced Fund (Balanced Fund),
a portfolio of The Prudential Institutional Fund, will be exchanged for Class Z
shares of Balanced Portfolio (the Portfolio), a portfolio of Prudential
Allocation Fund, and the Portfolio will assume all of the liabilities, if any,
of Balanced Fund. Immediately thereafter, Class Z shares of the Portfolio will
be distributed to the shareholders of Balanced Fund in a total liquidation of
Balanced Fund, which will subsequently be terminated. The following pro forma
financial statements include a pro forma Portfolio of Investments at January 31,
1996, a pro forma Statement of Assets and Liabilities at January 31, 1996, and a
pro forma Statement of Operations for the twelve months ended January 31, 1996.
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--90.9%
COMMON STOCKS--52.4%
AEROSPACE/DEFENSE--0.7%
Allied-Signal,
4,700 4,700 Inc............... $ 234,413 $ 234,413
55,800 55,800 Boeing Co........... $ 4,331,475 4,331,475
General Motors
8,400 8,400 Corp., Class H.... 478,800 478,800
Litton Industries
10,400 10,400 Inc............... 512,200 512,200
-------------- ----------- ------------
4,331,475 1,225,413 5,556,888
-------------- ----------- ------------
AUTOMOTIVE--0.6%
130,000 6,900 136,900 Varity Corp......... 4,810,000 255,300 5,065,300
-------------- ----------- ------------
BANKING--0.2%
Bank of Boston
6,300 6,300 Corp.............. 288,225 288,225
Bank of New York
8,400 8,400 Co., Inc.......... 430,500 430,500
First Chicago
6,878 6,878 Corp.............. 267,382 267,382
23,600 23,600 Norwest Corp........ 811,250 811,250
----------- ------------
1,797,357 1,797,357
----------- ------------
CHEMICALS--2.9%
390,600 21,000 411,600 Agrium Inc.......... 5,346,320 288,346 5,634,666
Cytec Industries,
10,400 10,400 Inc............... 793,000 793,000
98,000 98,000 Dow Chemical Co..... 7,301,000 7,301,000
du Pont (E.I.) de
8,000 8,000 Nemours & Co...... 615,000 615,000
Grace (W.R.) &
9,000 9,000 Co................ 554,625 554,625
Imperial Chemical
Inds (ADR)
(United
8,000 8,000 Kingdom).......... 399,000 399,000
Mississippi Chemical
15,500 15,500 Corp.............. 366,188 366,188
6,600 6,600 Olin Corp........... 543,675 543,675
Union Carbide
175,000 175,000 Corp.............. 7,371,875 7,371,875
Uniroyal Chemical
36,100 36,100 Corp.............. 329,413 329,413
-------------- ----------- ------------
20,019,195 3,889,247 23,908,442
-------------- ----------- ------------
</TABLE>
2
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
CHEMICAL--SPECIALTY--0.1%
19,500 19,500 Ferro Corp.......... $ 489,938 $ 489,938
7,000 7,000 FMC Corp............ 510,125 510,125
2,100 2,100 Hanna (M.A.) Co..... 58,013 58,013
3,100 3,100 OM Group, Inc....... 102,300 102,300
----------- ------------
1,160,376 1,160,376
----------- ------------
COMMUNICATION--EQUIPMENT--0.1%
Oak Industries,
13,500 13,500 Inc............... 310,500 310,500
----------- ------------
COMPUTER & RELATED
EQUIPMENT-- 10.4%
67,100 67,100 Advanta Corp........ $ 2,818,200 2,818,200
158,550 158,550 Advanta Corp........ 6,560,006 6,560,006
267,000 267,000 Bay Networks........ 11,347,500 11,347,500
Cisco Systems,
228,000 228,000 Inc............... 18,981,000 18,981,000
Compaq Computer
82,300 82,300 Corp.............. 3,878,387 3,878,387
186,000 186,000 COMS Corp........... 3,487,500 3,487,500
Comverse Technology,
90,000 90,000 Inc............... 1,743,750 1,743,750
166,100 166,100 EMC Corp............ 3,176,662 3,176,662
12,100 12,100 Honeywell, Inc...... 615,588 615,588
3,500 3,500 IBM................. 380,625 380,625
150,000 150,000 Intel Corp.......... 8,285,156 8,285,156
Lexmark
International
12,500 12,500 Group, Inc........ 225,000 225,000
79,100 79,100 Motorola, Inc....... 4,251,625 4,251,625
Network Express,
214,900 214,900 Inc............... 832,737 832,737
Quad Systems
73,900 73,900 Corp.............. 572,725 572,725
Ross Technology
75,900 75,900 Inc............... 986,700 986,700
Sun Microsystems,
236,000 236,000 Inc............... 10,856,000 10,856,000
Western Digital
314,000 314,000 Corp.............. 5,809,000 5,809,000
-------------- ----------- ------------
83,586,948 1,221,213 84,808,161
-------------- ----------- ------------
CONSUMER
SERVICES--0.1%
21,100 21,100 ADT Ltd............. 305,950 305,950
Pittston Brinks
13,000 13,000 Group............. 325,000 325,000
----------- ------------
630,950 630,950
----------- ------------
CONTAINERS &
PACKAGING--0.3%
Stone Container
148,800 148,800 Corp.............. 2,176,200 2,176,200
-------------- ------------
DIVERSIFIED CONSUMER
PRODUCTS--0.1%
30,000 30,000 Whitman Corp........ 682,500 682,500
----------- ------------
DRUGS & HEALTH
CARE--5.0%
134,500 134,500 AMGEN Inc........... 8,086,813 8,086,813
84,500 84,500 Bard (C.R.), Inc.... 2,957,500 2,957,500
Baxter International
10,100 10,100 Inc............... 459,550 459,550
</TABLE>
3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
DRUGS & HEALTH CARE
(CONTINUED)
Columbia/HCA
Healthcare
93,000 93,000 Corp.............. $ 5,173,125 $ 5,173,125
Community Health
4,700 4,700 Systems Inc....... $ 180,950 180,950
Forest Laboratories,
67,400 67,400 Inc............... 3,639,600 3,639,600
95,000 95,000 Johnson & Johnson... 9,120,000 9,120,000
Physician Corp. of
111,400 111,400 America........... 2,005,200 2,005,200
Quorum Health
7,000 7,000 Group............. 178,063 178,063
Schering-Plough
8,000 8,000 Corp.............. 433,000 433,000
St. Jude Medical,
76,850 76,850 Inc............... 3,391,006 3,391,006
Tenet Healthcare
33,000 33,000 Corp.............. 705,375 705,375
United States
186,000 186,000 Surgical Corp..... 4,836,000 4,836,000
-------------- ----------- ------------
39,209,244 1,956,938 41,166,182
-------------- ----------- ------------
ELECTRICAL
EQUIPMENT--0.6%
15,600 15,600 Belden, Inc......... 429,000 429,000
UCAR International
149,800 6,800 156,600 Inc............... 4,662,525 211,650 4,874,175
-------------- ----------- ------------
4,662,525 640,650 5,303,175
-------------- ----------- ------------
ELECTRONICS--3.9%
Anixter
International
28,000 28,000 Inc............... 532,000 532,000
Applied Materials,
127,800 127,800 Inc............... 4,728,600 4,728,600
Emerson Electric
6,000 6,000 Co................ 502,500 502,500
KLA Instruments
91,100 91,100 Corp.............. 2,687,450 2,687,450
SGS-Thomson
Microelectronics
N.V.(a)
10,600 10,600 (France).......... 384,250 384,250
Tencor
178,500 178,500 Instruments....... 4,116,656 4,116,656
Texas Instruments
120,000 120,000 Inc............... 5,580,000 5,580,000
Ultratech Stepper
230,200 230,200 Inc............... 6,762,125 6,762,125
177,000 177,000 Uniphase Corp....... 6,195,000 6,195,000
-------------- ----------- ------------
30,069,831 1,418,750 31,488,581
-------------- ----------- ------------
ENGINEERING &
CONSTRUCTION--0.1%
Giant Cement Holding
32,000 32,000 Inc............... 368,000 368,000
Martin Marietta
15,100 15,100 Corp.............. 318,988 318,988
----------- ------------
686,988 686,988
----------- ------------
EXPLORATION &
PRODUCTION--0.2%
Cabot Oil & Gas
19,400 19,400 Corp.............. 322,525 322,525
Cross Timbers Oil
30,000 30,000 Co................ 513,750 513,750
Enron Oil & Gas
12,900 12,900 Corp.............. 314,438 314,438
Parker & Parsley
11,000 11,000 Petroleum Co...... 235,125 235,125
Seagull Energy
6,700 6,700 Corp.............. 123,113 123,113
Vintage Petroleum,
10,500 10,500 Inc............... 229,688 229,688
----------- ------------
1,738,639 1,738,639
----------- ------------
</TABLE>
4
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
FINANCIAL
SERVICES--7.5%
Ahmanson (H.F.) &
44,400 44,400 Co................ $ 1,065,600 $ 1,065,600
35,300 35,300 Citicorp............ 7,148,250 7,148,250
Dean Witter,
115,800 12,400 128,200 Discover & Co..... 6,267,675 $ 671,150 6,938,825
Federal National
Mortgage
543,200 543,200 Association....... 18,740,400 18,740,400
Finova Group,
8,600 8,600 Inc............... 434,300 434,300
297,200 297,200 Money Store, Inc.... 5,795,400 5,795,400
Republic New York
117,300 117,300 Corp.............. 6,832,725 6,832,725
186,000 186,000 Salomon, Inc........ 7,091,250 7,091,250
Student Loan
Marketing
93,600 93,600 Association....... 6,891,300 6,891,300
-------------- ----------- ------------
59,832,600 1,105,450 60,938,050
-------------- ----------- ------------
HOUSEHOLD
PRODUCTS--0.2%
Colgate-Palmolive
15,500 15,500 Co................ 1,147,000 1,147,000
13,000 13,000 Libbey, Inc......... 266,500 266,500
-------------- ----------- ------------
1,147,000 266,500 1,413,500
-------------- ----------- ------------
HOUSING
RELATED--0.2%
Ethan Allen
13,000 13,000 Interiors, Inc.... 303,875 303,875
Owens Corning
16,000 16,000 Fiberglas Corp.... 724,000 724,000
9,000 9,000 USG Corp............ 267,750 267,750
----------- ------------
1,295,625 1,295,625
----------- ------------
INSURANCE--5.8%
Allmerica Financial
8,600 8,600 Corp.............. 228,975 228,975
166,200 166,200 Allstate Corp....... 7,375,125 7,375,125
62,800 62,800 Amerin Corp......... 1,624,950 1,624,950
Berkley (W. R.)
9,000 9,000 Corp.............. 452,250 452,250
Equitable Companies,
253,600 10,500 264,100 Inc............... 6,244,900 388,500 6,633,400
Equitable of Iowa
83,700 837,000 Cos............... 3,096,900 3,096,900
John Alden Financial
7,000 7,000 Corp.............. 145,250 145,250
10,000 10,000 NAC Re Corp......... 340,000 340,000
9,700 9,700 National Re Corp.... 350,413 350,413
Pencorp Financial
16,000 16,000 Group, Inc........ 480,000 480,000
Primark
116,600 116,600 Corporation....... 3,891,525 3,891,525
Reinsurance Group of
21,000 21,000 America, Inc...... 756,000 756,000
271,100 271,100 SunAmerica, Inc..... 13,351,675 13,351,675
TIG Holdings,
15,000 15,000 Inc............... 416,250 416,250
Travelers Group
117,000 6,000 123,000 Inc............... 7,692,750 394,500 8,087,250
Western National
27,800 27,800 Corp.............. 455,215 455,225
-------------- ----------- ------------
43,277,825 4,407,353 47,229,963
-------------- ----------- ------------
INTEGRATED
PRODUCERS--0.1%
Total S.A., (ADR)
20,000 20,000 (France).......... 690,000 690,000
----------- ------------
</TABLE>
5
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
MACHINERY--0.2%
Applied Power,
18,000 18,000 Inc............... $ 549,000 $ 549,000
Gardner Denver
26,000 26,000 Machinery, Inc.... 481,000 481,000
Global Industrial
Technologies,
26,000 26,000 Inc............... 591,500 591,500
4,500 4,500 Sundstrand Corp..... 310,500 310,500
----------- ------------
1,932,000 1,932,000
----------- ------------
MEDIA--0.4%
Comcast Corp. Class
20,000 20,000 A................. 390,000 390,000
Cox Communications,
14,900 14,900 Inc............... 311,038 311,038
3,600 3,600 Gannett, Inc........ 228,600 228,600
Hollinger
International,
17,000 17,000 Inc............... 170,000 170,000
Knight-Ridder,
4,200 4,200 Inc............... 278,775 278,775
Tele Communications,
Inc., Ser. A,
29,200 29,200 TCI Group......... 616,850 616,850
Tele Communications,
7,300 7,300 Inc............... 199,838 199,838
10,000 10,000 Time Warner, Inc.... 415,000 415,000
8,237 8,237 Times Mirror Co..... 255,347 255,347
----------- ------------
2,865,448 2,865,448
----------- ------------
MISCELLANEOUS BASIC
INDUSTRY--0.6%
Coltec Industries
15,400 15,400 Inc............... 180,950 180,950
8,700 8,700 Crane Co............ 344,738 344,738
5,000 5,000 Danaher Corp........ 159,375 159,375
Fisher Scientific
International,
15,000 15,000 Inc............... 528,750 528,750
Hanson PLC (ADR)
(United
18,900 18,900 Kingdom).......... 92,950 292,950
10,000 10,000 IDEX Corp........... 380,000 380,000
33,000 33,000 INTERCO Inc......... 301,125 301,125
Illinois Tool Works,
9,000 9,000 Inc............... 552,375 552,375
Mark IV Industries,
17,960 17,960 Inc............... 374,915 374,915
Modine Manufacturing
3,100 3,100 Co................ 78,275 78,275
7,000 7,000 Pentair, Inc........ 367,500 367,500
Tyco International
20,000 20,000 Ltd............... 707,500 707,500
United Dominion
17,100 17,100 Inds.............. 401,850 401,850
York International
11,000 11,000 Corp.............. 504,625 504,625
----------- ------------
5,174,928 5,174,928
----------- ------------
OIL & GAS--1.1%
Atlantic Richfield
83,000 83,000 Co................ $ 2,085,375 2,085,375
137,600 137,600 Mesa, Inc........... 481,600 481,600
Noble Drilling
337,300 337,300 Corp.............. 3,309,756 3,309,756
Occidental Petroleum
18,000 18,000 Corp.............. 387,000 387,000
146,300 41,000 187,300 Oryx Energy Co...... 1,920,188 538,125 2,458,313
Santa Fe Energy
15,000 15,000 Resources, Inc.... 144,375 144,375
-------------- ----------- ------------
7,796,919 1,069,500 8,866,419
-------------- ----------- ------------
</TABLE>
6
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
PAPER & FOREST
PRODUCTS--1.8%
Georgia-Pacific
100,000 100,000 Corp.............. $ 7,337,500 $ 7,337,500
International Paper
180,000 180,000 Co................ 7,357,500 7,357,500
-------------- ------------
14,695,000 14,695,000
-------------- ------------
PETROLEUM
SERVICES--1.7%
335,500 335,500 BJ Services Co...... 8,974,625 8,974,625
Smith International,
225,000 225,000 Inc............... 5,287,500 5,287,500
-------------- ------------
14,262,125 14,262,125
-------------- ------------
RAILROADS--0.2%
Burlington Northern
6,400 6,400 Inc............... $ 524,000 524,000
Canadian National
2,300 2,300 Railway Co........ 40,538 40,538
Canadian Pacific
11,600 11,600 Ltd............... 226,200 226,200
Illinois Central
8,900 8,900 Corp.............. 335,975 335,975
Union Pacific
7,000 7,000 Corp.............. 466,375 466,375
----------- ------------
1,593,088 1,593,088
----------- ------------
REALTY INVESTMENT
TRUST--0.2%
Manufactured Home
Communities,
85,700 85,700 Inc............... 1,564,025 1,564,025
-------------- ------------
RESTAURANTS/FOOD
SERVICE--0.1%
4,000 4,000 Sbarro Inc.......... 89,000 89,000
----------- ------------
RETAIL--0.9%
Best Products,
42,800 42,800 Inc............... 173,875 173,875
122,000 122,000 Caldor Corp......... 396,500 396,500
Dillard Department
186,000 10,100 196,100 Stores, Inc....... 5,394,000 292,900 5,686,900
4,900 4,900 Eckerd Corp......... 213,763 213,763
Harcourt General,
11,800 11,800 Inc............... 460,200 460,200
May Deptartment
8,500 8,500 Stores Co......... 378,250 378,250
-------------- ----------- ------------
5,790,500 1,518,988 7,309,488
-------------- ----------- ------------
RUBBER--0.1%
Goodyear Tire &
9,000 9,000 Rubber Co......... 430,875 430,875
----------- ------------
SOFTWARE--1.8%
Automatic Data
Processing,
6,000 6,000 Inc............... 478,500 478,500
Baan Co. N.V.
35,900 35,900 (Netherlands)..... 1,557,163 1,557,163
90,500 90,500 Microsoft Corp...... 8,371,250 8,371,250
26,400 26,400 PIXAR Inc........... 528,000 528,000
Softkey
International
263,700 263,700 Inc............... 3,658,838 3,658,838
-------------- ----------- ------------
14,115,251 478,500 14,593,751
-------------- ----------- ------------
STEEL--0.4%
AK Steel Holding
102,300 102,300 Corp.............. 3,542,138 3,542,138
-------------- ------------
</TABLE>
7
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
STEEL & METALS--1.6%
73,000 73,000 Alumax, Inc......... $ 2,299,500 $ 2,299,500
Aluminum Co. of
130,000 130,000 America........... 7,215,000 7,215,000
National Steel
272,000 272,000 Corp.............. 3,740,000 3,740,000
-------------- ------------
13,254,500 13,254,500
-------------- ------------
TELECOMMUNICATIONS--0.8%
20,700 20,700 Frontier Corp....... $ 615,825 615,825
MCI
20,900 20,900 Communications.... 598,263 598,263
NEXTEL
Communications
395,300 395,300 Inc............... 5,435,375 5,435,375
-------------- ----------- ------------
5,435,375 1,214,088 6,649,463
-------------- ----------- ------------
TOBACCO--1.5%
Philip Morris Co.,
65,100 65,100 Inc............... 6,054,300 6,054,300
RJR Nabisco Holdings
933,700 933,700 Corp.............. 6,185,763 6,185,763
-------------- ------------
12,240,063 12,240,063
-------------- ------------
TRUCKING &
SHIPPING--0.1%
Pittston Burlington
11,700 11,700 Company........... 232,538 232,538
----------- ------------
UTILITY-COMMUNCATIONS--0.1%
Airtouch
Communications,
9,100 9,100 Inc............... 257,075 257,075
5,900 5,900 AT&T Corp........... 394,563 394,563
----------- ------------
651,638 651,638
----------- ------------
Total Common Stocks
(Cost
$375,899,255)..... 385,818,739 42,630,340 427,993,864
-------------- ----------- ------------
CONVERTIBLE
PREFERRED STOCKS
INSURANCE--0.3%
American General
Delaware
(Cost
39,400 39,400 $1,970,930)....... 2,196,550 2,196,550
-------------- ------------
DEBT
OBLIGATIONS--38.2%
<CAPTION>
PRINCIPAL (000)
------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
ASSET BACKED
SECURITIES--0.4%
Chemical Credit Card
Trust, Series
1995-3, Class A,
$ 400 $ 400 6.23%, 4/15/05.... 411,000 411,000
Circuit City Credit
Card Trust, Series
1994-2, Class A,
300 300 8.00%, 11/15/03... 323,154 323,154
Discover Card Master
Trust I, Series
1994-1, Class A,
400 400 6.70%, 2/16/00.... 408,372 408,372
</TABLE>
8
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<C> <C> <C> <S> <C> <C> <C>
ASSET BACKED
SECURITIES
(CONTINUED)
<CAPTION>
PRINCIPAL (000) VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
Nationsbank Credit
Card Master Trust,
Series
1993-2,Class A,
$ 400 $ 400 6.00%, 12/15/05... $ 401,624 $ 401,624
Prime Credit Card
Master Trust,
Series 1995-1,
Class A,
400 400 6.75%, 11/15/05... 420,124 420,124
Sears Credit Account
Master Trust II,
Series 1995-5,
Class A,
500 500 6.05%, 1/15/08.... 507,500 507,500
Standard Credit Card
Master Trust,
Series 1995-1
Class A,
400 400 8.25%, 1/7/07..... 455,624 455,624
----------- ------------
Total Asset Backed
Securities
(Cost
$2,882,530)....... 2,927,398 2,927,398
----------- ------------
CORPORATE
BONDS--13.7%
BANKING--0.1%
African Development
Bank,
400 400 7.70%, 7/15/02.... 437,232 437,232
Norwest Corp.,
300 300 7.125%, 4/1/00.... 315,783 315,783
----------- ------------
753,015 753,015
----------- ------------
COMMERCIAL
SERVICES--0.1%
Comdisco Inc.,
300 300 6.50%, 6/15/00.... 307,251 307,251
----------- ------------
COMPUTER & RELATED
EQUIPMENT--2.7%
Digital Equipment
Corp.,
7.125%,
$ 4,975 4,975 10/15/02.......... $ 5,039,824 5,039,824
E M C Corp.,
4,356 4,356 4.25%, 1/1/01..... 4,881,943 4,881,943
Motorola Inc., Zero
Coupon,
9,835 9,835 9/27/13........... 7,351,662 7,351,662
Seagate Technology
Inc.,
1,946 1,946 5.00%, 11/1/03.... 4,429,583 4,429,583
-------------- ------------
21,703,012 21,703,012
-------------- ------------
CONGLOMERATE--0.7%
Valhi, Inc, Zero
Coupon,
14,000 14,000 10/20/07.......... 5,551,000 5,551,000
-------------- ------------
CONTAINERS &
PACKAGING--0.4%
Stone Container
Corp.,
2,205 2,205 8.875%, 7/15/00... 3,194,494 3,194,494
-------------- ------------
</TABLE>
9
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL (000) VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
DRUGS & HEALTH
CARE--1.4%
Beverly Enterprises
Inc.,
$ 7,305 $ 7,305 5.50%, 8/1/18..... $ 7,314,131 $ 7,314,131
Roche Holdings Inc.,
(Switzerland)
Zero Coupon,
5,555 5,555 9/23/08........... 4,187,081 4,187,081
-------------- ------------
11,501,212 11,501,212
-------------- ------------
ELECTRONICS--0.9%
Integrated Device
Technology Inc.,
5,500 5,500 5.50%, 6/1/02..... 4,555,595 4,555,595
Westinghouse
Electric Corp.,
2,500 2,500 6.875%, 9/1/03.... 2,436,475 2,436,475
-------------- ------------
6,992,070 6,992,070
-------------- ------------
FINANCIAL
SERVICES--3.0%
American General
Finance Corp.,
$ 400 400 7.25%, 5/15/05.... $ 426,312 426,312
Associates Corp. of
North America,
750 750 6.875%, 1/15/97... 759,690 759,690
200 200 8.375%, 1/15/98... 211,218 211,218
Banco Nacional De
Mexico, (Mexico)
3,160 3,160 7.00%, 12/15/99... 2,776,850 2,776,850
Commercial Credit
Group Inc.,
200 200 7.875%, 7/15/04... 222,168 222,168
Finova Capital
Corp.,
300 300 6.28%, 11/1/99.... 304,668 304,668
100 100 6.30%, 11/1/99.... 101,622 101,622
First Union Corp.,
Sub. Note,
1,000 1,000 9.45%, 6/15/99.... 1,115,860 1,115,860
Ford Motor Credit
Co.,
9.375%,
400 400 12/15/97.......... 427,516 427,516
300 300 6.25%, 12/8/05.... 297,564 297,564
5,000 5,000 7.75%, 3/15/05.... 5,499,600 5,499,600
General Motors
Acceptance Corp.,
450 450 9.625%, 5/15/00... 513,374 513,374
Greyhound Financial
Corp.,
100 100 8.50%, 5/1/98..... 106,092 106,092
International Lease
Finance Corp.,
200 200 5.50%, 4/1/97..... 199,996 199,996
Lehman Brothers,
Inc.,
200 200 7.125%, 7/15/02... 208,120 208,120
Salomon, Inc.,
200 200 8.64%, 2/27/98.... 209,774 209,774
</TABLE>
10
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL (000) VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
FINANCIAL SERVICES
(CONTINUED)
Sears Roebuck
Acceptance Corp.,
$ 10,000 $ 300 $10,300 6.75%, 9/15/05.... $ 10,355,600 $ 310,668 $ 10,666,268
Teneco Credit Corp.,
400 400 9.625%, 8/15/01... 467,364 467,364
-------------- ----------- ------------
20,718,818 3,795,238 24,514,056
-------------- ----------- ------------
FOOD &
BEVERAGE--0.1%
Coca Cola
Enterprises, Inc.,
500 500 6.50%, 11/15/97... 509,535 509,535
-------------- ------------
FOREIGN
INDUSTRIAL--0.1%
Nippon Denro Ispat,
Ltd., (India)
2,000 2,000 3.00%, 4/1/01..... 1,165,000 1,165,000
-------------- ------------
INDUSTRIALS--0.1%
Caterpillar Inc.,
250 250 9.375%, 7/15/00... 283,780 283,780
----------- ------------
INSURANCE--0.5%
USF&G Corp., Zero
Coupon,
7,135 7,135 3/3/09............ 3,995,600 3,995,600
-------------- ------------
MISCELLANEOUS BASIC
INDUSTRY--0.1%
Hanson PLC.,
400 400 7.375%, 1/15/03... 422,972 422,972
----------- ------------
OIL & GAS--1.2%
Arkla, Inc., (MTN),
1,000 1,000 9.30%, 1/15/98.... 1,054,810 1,054,810
Noble Affiliates
Inc.
5,434 5,434 4.25%, 11/1/03.... 5,474,755 5,474,755
Oryx Energy Co.,
2,420 2,420 7.50%, 5/15/14.... 2,202,200 2,202,200
Petroliam Nasional
Berhad, (Malaysia)
500 500 6.875%, 7/1/03.... 520,100 520,100
Union Oil Co.,
300 300 7.75%, 4/20/05.... 326,421 326,421
-------------- ----------- ------------
8,731,765 846,521 9,578,286
-------------- ----------- ------------
RETAIL--0.5%
K Mart Corp.,
7,000 7,000 8.125%, 12/1/06... 4,200,000 4,200,000
Sears Roebuck & Co.,
100 100 9.48%, 7/24/01.... 115,721 115,721
-------------- ----------- ------------
4,200,000 115,721 4,315,721
-------------- ----------- ------------
</TABLE>
11
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL (000) VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
TOBACCO--0.5%
RJR Nabisco, Inc.,
$ 5,000 $ 5,000 7.625%, 9/15/03... $ 4,967,100 $ 4,967,100
-------------- ------------
TOURISM/RESORTS--1.3%
Carnival Cruise
Lines, Inc.,
3,260 3,260 4.50%, 7/1/97..... 5,116,766 5,116,766
Royal Caribbean
Cruises Ltd.,
5,000 5,000 8.25%, 4/1/05..... 5,472,850 5,472,850
-------------- ------------
10,589,616 10,589,616
-------------- ------------
TRUCKING &
SHIPPING--0.1%
Federal Express
Corp.,
$ 350 350 10.00%, 9/1/98.... $ 386,344 386,344
----------- ------------
UTILITIES--0.2%
Consolidated Edison
Co.,
300 300 6.625%, 2/1/02.... 308,793 308,793
Detroit Edison Co.,
350 350 6.34%, 3/15/00.... 356,402 356,402
Hydro Quebec Corp.,
250 250 8.40%, 1/15/22.... 287,560 287,560
Texas Utilities Co.,
300 300 6.375%, 8/1/97.... 303,738 303,738
----------- ------------
1,256,493 1,256,493
----------- ------------
Total Corporate
Bonds
(Cost
$109,167,188)..... 103,819,222 8,167,335 111,986,557
-------------- ----------- ------------
SOVEREIGN BOND--0.1%
Republic of Italy
6.875%, 9/27/23
300 300 (Cost $278,235)... 290,031 290,031
----------- ------------
U.S. GOVERNMENT
SECURITIES--24.1%
United States
Treasury Bond,
1,600 1,600 10.75%, 8/15/05... 2,196,496 2,196,496
6,150 6,150 11.25%, 2/15/15... 9,785,204 9,785,204
30,000 30,000 7.625%, 2/15/25... 36,318,600 36,318,600
-------------- ----------- ------------
36,318,600 11,981,700 48,300,300
-------------- ----------- ------------
United States
Treasury Note,
5.625%,
40,000 40,000 10/31/97.......... 40,450,000 40,450,000
1,000 1,000 6.00%, 11/30/97... 1,018,120 1,018,120
4,300 4,300 5.375%, 5/31/98... 4,334,916 4,334,916
4,900 4,900 6.375%, 1/15/99... 5,073,803 5,073,803
1,600 1,600 7.50%, 10/31/99... 3,126,548 3,126,548
30,000 30,000 6.125%, 7/31/00... 31,040,700 31,040,700
600 600 6.25%, 2/15/03.... 627,564 627,564
</TABLE>
12
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL (000) VALUE
------------------------------------------------ -----------------------------------------------------
BALANCED BALANCED BALANCED BALANCED PRO FORMA
PORTFOLIO FUND TOTAL DESCRIPTION PORTFOLIO FUND COMBINED
-------------- ----------------------- ------- -------------------- -------------- ----------------------- ------------
<C> <C> <C> <S> <C> <C> <C>
U.S. GOVERNMENT
SECURITIES
(CONTINUED)
$ 1,600 $ 1,600 7.25%, 8/15/04.... $ 1,779,504 $ 1,779,504
$ 30,100 30,100 7.50%, 2/15/05.... $ 34,083,434 34,083,434
25,000 25,000 6.50%, 5/15/05.... 26,578,000 26,578,000
-------------- ----------- ------------
132,152,134 15,960,455 148,112,589
-------------- ----------- ------------
Total U. S.
Securities
(Cost
$186,082,146)..... 168,470,734 27,942,155 196,412,889
-------------- ----------- ------------
Total Debt
Obligations
(Cost
$298,410,096)..... 272,289,956 39,326,919 311,616,875
-------------- ----------- ------------
Total Long-Term
Investments
(Cost
$676,280,281)..... 660,305,245 81,957,259 741,807,289
-------------- ----------- ------------
SHORT-TERM
INVESTMENTS--4.3%
CORPORATE
NOTES--0.1%
General Electric
Capital Corp.,
400 400 8.75%, 11/26/96... 410,484 410,484
Westinghouse Credit
Corp., (MTN)
400 400 8.75%, 6/3/96..... 402,204 402,204
Westinghouse
Electric Corp.,
450 450 8.70%, 6/20/96.... 452,844 452,844
-------------- ----------- ------------
Total Corporate
Notes
(Cost
$1,291,568)....... 855,048 410,484 1,265,532
-------------- ----------- ------------
U.S. GOV'T AGENCY
MORTGAGE BACKED
SECURITIES--0.1%
Federal Home Loan
Bank
170 170 5.413%, 2/2/96.... 169,974 169,974
100 100 5.43%, 3/26/96.... 99,233 99,233
----------- ------------
Total U.S. Gov't
Agency Mortgage
Securities
(Cost $269,160)... 269,207 269,207
----------- ------------
REPURCHASE
AGREEMENTS--4.1%
Joint Repurchase
Agreement Account,
23,255 10,047 33,302 5.91%, 2/1/96..... 23,255,000 10,047,000 33,302,000
-------------- ----------- ------------
TOTAL SHORT-TERM
INVESTMENTS
(Cost
$34,862,728)...... 24,110,048 10,726,691 34,836,739
-------------- ----------- ------------
TOTAL
INVESTMENTS--95.2%
(Cost
$711,143,009)..... 684,415,293 92,683,950 777,099,243
-------------- ----------- ------------
OTHER ASSETS IN
EXCESS
OF
LIABILITIES--4.8%... 39,468,638 (86,750 ) 39,555,388
-------------- ----------- ------------
NET ASSETS--100%.... $ 723,883,931 $ 92,597,200 $816,481,131
-------------- ----------- ------------
-------------- ----------- ------------
</TABLE>
13
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
ALLOCATION THE PRUDENTIAL
FUND INSTITUTIONAL
BALANCED FUND PRO FORMA
PORTFOLIO BALANCED FUND COMBINED
----------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost $628,187,768 $82,955,241; and
$711,143,009, respectively)....................................... $ 684,415,293 $ 92,683,950 $ 777,099,243
Cash................................................................ 61,361 643 62,004
Receivable for investments sold..................................... 63,117,162 592,942 63,710,104
Dividends and interest receivable................................... 4,967,376 799,679 5,767,055
Receivable for Fund shares sold..................................... 957,547 149,395 1,106,942
Deferred expenses and other assets.................................. 16,440 24,286 40,726
----------------- -------------- -------------
Total assets........................................................ 753,535,179 94,250,895 847,786,074
----------------- -------------- -------------
LIABILITIES
Payable for investments purchased................................... 26,920,703 1,254,495 28,175,198
Payable for Fund shares reacquired.................................. 1,812,805 310,908 2,123,713
Distribution fee payable............................................ 428,077 0 428,077
Management fee payable.............................................. 388,315 49,784 438,099
Administration fee payable.......................................... 0 10,123 10,123
Accrued expenses.................................................... 101,348 28,385 129,733
----------------- -------------- -------------
Total liabilities................................................... 29,651,248 1,653,695 31,304,943
----------------- -------------- -------------
Net Assets.......................................................... $ 723,883,931 $ 92,597,200 $ 816,481,131
----------------- -------------- -------------
----------------- -------------- -------------
Net assets were comprised of:
Shares of beneficial interest, at par........................... $ 606,245 $ 7,401 $ 683,603
Paid-in capital in excess of par................................ 651,914,125 82,107,127 733,951,295
----------------- -------------- -------------
652,520,370 82,114,528 734,634,898
Undistributed net investment income................................. 3,572,298 200,147 3,772,445
Accumulated net realized gain on investments........................ 11,563,738 553,816 12,117,554
Net unrealized appreciation on investments.......................... 56,227,525 9,728,709 65,956,234
----------------- -------------- -------------
Net assets, January 31, 1996........................................ $ 723,883,931 $ 92,597,200 $ 816,481,131
----------------- -------------- -------------
----------------- -------------- -------------
Class A:
Net asset value and redemption price per share.................. $11.97 $11.97
Maximum sales charge (5.00% of offering price).................. 0.63 0.63
----------------- -------------
Maximum offering price to public................................ $12.60 $12.60
----------------- -------------
----------------- -------------
Class B:
Net asset value, offering price and redemption price per
share......................................................... $11.92 $11.92
----------------- -------------
----------------- -------------
Class C:
Net asset value, offering price and redemption price per
share......................................................... $11.92 $11.92
----------------- -------------
----------------- -------------
Class Z or Prudential Institutional Fund shares:
Net asset value, offering price and redemption price per
share......................................................... $12.51 $11.97
-------------- -------------
-------------- -------------
</TABLE>
14
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL
ALLOCATION THE PRUDENTIAL
FUND INSTITUTIONAL
BALANCED FUND PRO FORMA PRO FORMA
PORTFOLIO BALANCED FUND ADJUSTMENTS COMBINED
----------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest.......................................... $ 16,992,672 $ 2,625,331 $ 19,618,003
Dividends (net of foreign withholding taxes of
$69,313, $0, and $69,313, respectively).......... 4,991,552 520,847 5,512,399
----------------- -------------- -------------
Total income.................................... 21,984,224 3,146,178 25,130,402
----------------- -------------- -------------
Expenses
Distribution fee--Class A......................... 402,689 0 402,689
Distribution fee--Class B......................... 4,043,825 0 4,043,825
Distribution fee--Class C......................... 15,934 0 15,934
Management fee.................................... 3,686,000 547,017 $ (39,073)(a) 4,193,944
Administration fee................................ 0 104,290 (104,290)(b) 0
Transfer agent's fees and expenses................ 1,269,000 18,331 1,287,331
Reports to shareholders........................... 304,000 30,000 (30,000)(c) 304,000
Custodian's fees and expenses..................... 133,000 55,000 (25,000)(c) 163,000
Registration fees................................. 81,000 23,000 104,000
Legal fees........................................ 35,000 11,000 (11,000)(c) 35,000
Trustees' fees and expenses....................... 23,000 9,000 (9,000)(c) 23,000
Insurance......................................... 20,000 0 20,000
Audit fee and expenses............................ 18,000 11,000 (11,000)(c) 18,000
Amortization of organization expenses............. 0 13,312 13,312
Miscellaneous..................................... 4,424 4,730 9,154
----------------- -------------- -------------- -------------
Total expenses.................................. 10,035,872 826,680 (229,363) 10,633,189
Expense subsidy................................... 0 (46,220) 46,220(d) 0
----------------- -------------- -------------- -------------
Net expenses.................................... 10,035,872 780,460 (183,143) 10,633,189
----------------- -------------- -------------- -------------
Net investment income............................... 11,948,352 2,365,718 183,143 14,497,213
----------------- -------------- -------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investment transactions......................... 38,621,486 3,544,481 42,165,967
Foreign currency transactions................... (106,911) 12,276 (94,635)
----------------- -------------- -------------
38,514,575 3,556,757 42,071,332
Net change in unrealized appreciation on invest-
ments............................................ 60,217,316 10,374,060 70,591,376
----------------- -------------- -------------
Net gain on investments........................... 98,731,891 13,930,817 112,662,708
----------------- -------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $ 110,680,243 $ 16,296,535 $ 183,143 $ 127,159,921
----------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------
</TABLE>
- ------------------------
(a) Adjustment to reflect reduction in management fees from that of The
Prudential Institutional Fund Balanced Fund.
(b) Adjustment to reflect elimination of administration fee in Prudential
Allocation Fund Balanced Portfolio.
(c) Adjustment to reflect elimination of duplicative expenses.
(d) Adjustment to reflect elimination of expense subsidy in Prudential
Allocation Fund Balanced Portfolio.
15
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
Prudential Allocation Fund (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 Balanced Portfolio and the
Strategy Portfolio. The investment objective of the Balanced 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 Balanced Portfolio through varying the
proportions of investments in debt and equity securities, the quality and
maturity of debt securities purchased and the price volatility and the type of
issuer of equity securities purchased. The ability of issuers of debt securities
held by the Fund to meet their obligations may be affected by economic
developments in a specific country, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of generally accepted accounting policies followed
by the Fund in the preparation of its financial statements.
SECURITIES VALUATION: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Options are valued at
the mean between the most recently quoted bid and asked prices. Futures and
options thereon are valued at their last sales price as of the close of the
commodities exchange or board of trade.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, under triparty repurchase agreements, as the case may be, 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.
16
<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.
SECURITIES TRANSACTIONS AND NET 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 and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
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. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing 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.
OPTIONS: The Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
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.
17
<PAGE>
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 currency transactions.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with AICPA 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, 1996, the Balanced Portfolio decreased
undistributed net investment income and increased accumulated net realized gain
on investments by $102,600. Net realized gains and net assets were not affected
by this change.
REORGANIZATION AND SOLICITATION EXPENSE: Expenses of reorganization and
solicitation will be borne by the Balanced Fund and the Balanced Portfolio in
proportion to their respective assets and will include reimbursement of
brokerage firms and others for expenses in forwarding proxy solicitation
material to shareholders.
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 a distribution agreement with Prudential Securities Incorporated
("PSI") which acts as the distributor of the Class A, Class B and Class C shares
of the Fund, pursuant to plans of distribution (the "Class A, B and C Plans"),
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and
Prudential Mutual Fund Distributors, Inc. ("PMFD") for the period August 1, 1995
through January 1, 1996 with respect to Class A shares, 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, 1996.
PMFD is a wholly owned subsidiary of PMF. PSI, PIC and PMF are indirect,
wholly owned subsidiaries of The Prudential Insurance Company of America.
18
<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
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
General Information...................................... B-2 25
Investment Objectives and Policies....................... B-2 9
Investment Restrictions.................................. B-11 18
Trustees and Officers.................................... B-13 19
Manager.................................................. B-15 19
Distributor.............................................. B-17 20
Portfolio Transactions and Brokerage..................... B-20 22
Purchase and Redemption of Fund Shares................... B-22 26
Shareholder Investment Account........................... B-25 34
Net Asset Value.......................................... B-28 22
Taxes.................................................... B-29 23
Performance Information.................................. B-31 22
Organization and Capitalization.......................... B-32 25
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................. B-34 22
Financial Statements..................................... B-35 --
Independent Auditors' Report............................. B-55 --
Appendix I............................................... I-1 --
Appendix II.............................................. II-1 --
- --------------------------------------------------------------------------------
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.
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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
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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.
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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.
If a Portfolio maintains a short position in a futures contract, it will
cover this position by holding, in a segregated account maintained at the
Custodian, cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value (when added to any initial or variation margin on
deposit) to the market value of the securities underlying the futures contract.
Such a position may also be covered by owning the securities underlying the
futures contract, or by holding a call option permitting the Portfolio to
purchase the same contract at a price no higher than the price at which the
short position was established.
In addition, if a Portfolio holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other liquid high-grade debt
obligations equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account maintained for
the Portfolio by the Fund's Custodian. Alternatively, a Portfolio could cover
its long position by purchasing a put option on the same futures contract with
an exercise price as high as or higher than the price of the contract held by
the Portfolio.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolios would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if a Portfolio has insufficient cash, it
may be disadvantageous to do so. In addition, a Portfolio may be required to
take or make delivery of the instruments underlying futures contracts it holds
at a time when it is disadvantageous to do so. The ability to close out options
and futures positions could also have an adverse impact on a Portfolio's ability
to effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in futures or options thereon, the Portfolio could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by the investment adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging a Portfolio's portfolio securities. One
such risk which may arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Portfolio's
portfolio securities. Another such risk is that prices of futures contracts may
not move in tandem with the changes in prevailing interest rates against which
the Portfolio seeks a
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hedge. A correlation may also be distorted by the fact that the futures market
is dominated by short-term traders seeking to profit from the difference between
a contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by a Portfolio and the movements in the prices of
the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the securities and futures market could result.
Price distortions could also result if investors in futures contracts elect to
make or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate or stock market trends by the investment adviser may still not result in a
successful hedging transaction.
Successful use of futures contracts by a Portfolio is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if a Portfolio has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Portfolio will
lose part or all of the benefit of the increased value of its securities because
it will have offsetting losses in its futures positions. In addition, in such
situations, if a Portfolio has insufficient cash to meet daily variation margin
requirements, it may need to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. A Portfolio may have to sell securities at a
time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which a Portfolio may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently, options can
be purchased or written with respect to futures contracts on U.S. Treasury
Bills, Notes and Bonds and on the S&P 500 Stock Index and the NYSE Composite
Index.
The holder or writer of an option may terminate his or her position by
selling or purchasing an option of the same series. There is no guarantee that
such closing transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF OPTIONS, FUTURES AND OPTIONS THEREON
Each Portfolio may write call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated as a
writer. The Fund has undertaken with certain state securities commissions that,
so long as shares of a Portfolio of the Fund are registered in those states,
neither Portfolio will purchase (i) put options on stocks not held by the
Portfolio, (ii) put options on indices and (iii) call options on stock or stock
indices or foreign currencies if, after any such purchase, the total premiums
paid for such options would exceed 10% of the Portfolio's total assets;
provided, however, that a Portfolio may purchase put options on stock held by
the Portfolio if after such purchase the aggregate premiums paid for such
options do not exceed 20% of the Portfolio's total net assets. In addition, the
aggregate value of the securities that are the subject of put options will not
exceed 50% of the Portfolio's net assets.
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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.
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.
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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 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
B-9
<PAGE>
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).
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
B-10
<PAGE>
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 201%, respectively. The portfolio turnover rates for the
Strategy Portfolio for the fiscal years ended July 31, 1994 and 1995 were 96%
and 180%, respectively. The portfolio turnover rate is generally the percentage
computed by dividing the lesser of portfolio purchases or sales (excluding all
securities, including options, whose maturities or expiration date at
acquisition were one year or less) by the monthly average value of such
portfolio securities. High portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs, which are borne directly by
each Portfolio. In addition, high portfolio turnover may also mean that a
proportionately greater amount of distributions to shareholders will be taxed as
ordinary income rather than long-term capital gains compared to investment
companies with lower portfolio turnover. See "Portfolio Transactions and
Brokerage" and "Taxes."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a Portfolio. A "majority of the
outstanding voting securities of a Portfolio," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
Each Portfolio may not:
1. Purchase securities on margin (but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Portfolio of initial or maintenance
margin in connection with futures contracts or options thereon is not considered
the purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except
short sales against-the-box.
3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. The Portfolio may pledge up to 20% of the value
of its total assets to secure such borrowings. For purposes of this restriction,
the preference as to shares of a Portfolio in liquidation and as to dividends
over all other Portfolios of the Fund with respect to assets specifically
allocated to that Portfolio, the purchase or sale of securities on a when-issued
or delayed delivery basis, the purchase of forward foreign currency exchange
contracts and collateral arrangements relating thereto, the purchase and sale of
options, financial futures contracts, options on such contracts and collateral
arrangements with respect thereto and with respect to interest rate swap
transactions and obligations of the Fund to Trustees pursuant to deferred
compensation arrangements are not deemed to be the issuance of a senior security
or a pledge of assets.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Portfolio's assets, more than 5% of the total assets of the Portfolio
(determined at the time of investment) would then be invested in securities of a
single issuer or (ii) more than 25% of the total assets of the Portfolio
(determined at the time of investment) would be invested in a single industry.
As to utility companies, gas, electric and telephone companies will be
considered as separate industries.
B-11
<PAGE>
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 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.
B-12
<PAGE>
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 (52) 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
1993); President and Director of The Global Government Plus
Fund, Inc., The Global Total Return Fund, Inc. and The High
Yield Income Fund, Inc.
</TABLE>
- ------------------------
* "Interested" Trustee, as defined in the investment Company Act, by reason of
his affiliation with Prudential Securities and PMF.
B-13
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<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 Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72, except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Lennox and Beach are
scheduled to retire on December 31, 1997 and 1999, respectively.
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.
B-14
<PAGE>
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustees' fees which accrue interest at a rate equivalent to
the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning of
each calendar quarter or, pursuant to an SEC exemptive order, at the daily rate
of return of the Fund. Payment of the interest so accrued is also deferred and
accruals become payable at the option of the Trustee. The Fund's obligation to
make payments of deferred Trustees' fees, together with interest thereon, is a
general obligation of the Fund.
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 (20/39)*
Donald D. Lennox--Trustee 8,500 None N/A 90,000 (10/13)*
Douglas H. McCorkindale--Trustee 8,500 None N/A 60,000 (7/10)*
Thomas T. Mooney--Trustee 8,500 None N/A 114,000 (15/36)*
Louis A. Weil III--Trustee 8,500 None N/A 97,500 (12/15)*
<FN>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
</TABLE>
As of September 15, 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 September 15, 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 5.3% and 14.9%, respectively, of the
Class C outstanding voting securities of the Balanced Portfolio. As of September
15, 1995, Prudential Bank & Trust Co C/F the IRA of Henry W. Anthony, RR1 Box
92, Fryeburg, ME 04037-9709, Steven N. Hendel, 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
Prudential Securities Inc. FA Allen C. Bellamy, 10610 Hanging Moss Trail,
Charlotte, NC 28227, were the beneficial owners of 12.8%, 9.1%, 10%, 7.3%, 5.5%
and 6% of the Class C outstanding voting securities of the Strategy Portfolio.
As of September 15, 1995, Prudential Securities was record holder for other
beneficial owners of 3,263,939 Class A shares (or 31% of the outstanding Class A
shares) of the Balanced Portfolio and 2,692,525 Class A shares (or 37% of the
outstanding Class A shares) of the Strategy Portfolio, 9,232,150 Class B shares
(or 29% of the outstanding Class B shares) of the Balanced Portfolio and
10,999,337 Class B shares (or 50% of the outstanding Class B shares) of the
Strategy Portfolio and 42,324 Class C shares (or 31% of the outstanding Class C
shares) of the Balanced Portfolio and 14,076 Class C shares (or 57% 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
B-15
<PAGE>
and/or administered open-end and closed-end management investment companies with
assets of approximately $51 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.
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, recordkeeping 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-16
<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
$3,120,574 and $2,370,080 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. 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, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in 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-17
<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 $174,385 and $142,549 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 $254,000 and $186,000 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 $4,094,190 and $3,074,388 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 FINANCIAL OVERHEAD COMMISSION SPENT BY
OTHER THAN ADVISERS OF COSTS PAYMENTS TO DISTRIBUTOR ON
CURRENT PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND BEHALF OF
PORTFOLIO SHAREHOLDERS SECURITIES SECURITIES* OTHER EXPENSES* PORTFOLIO
- ------------------------- --------------- ----------- --------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Balanced Portfolio....... $46,300 $ 713,400 $ 398,600 $1,229,400 $ 2,387,700
Strategy Portfolio....... 48,500 614,400 313,900 325,200 1,302,000
<FN>
- ------------------------
* Including lease, utility and sales promotional expenses.
</TABLE>
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Pruco Securities Corporation, an
affiliated broker-dealer (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-18
<PAGE>
Prospectus. For the fiscal year ended July 31, 1995, Prudential Securities
received approximately $963,500 and $714,000 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 $9,153 and $1,692 on behalf of the Balanced Portfolio and Strategy
Portfolio, respectively, under the Class C Plan and spent approximately $15,300
and $2,100, 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 ($5,000 and $900, respectively), (ii) payments to
Prusec ($3,400 and $200, respectively) and (iii) an allocation of overhead and
other branch office distribution related expenses for payments of related
expenses ($6,900 and $1,000, respectively). 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 $2,500 and $400 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-19
<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-20
<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.................................. $ 1,810,839 $ 906,929 $ 714,203
Total brokerage commissions paid to Prudential
Securities................................................................... $ 106,448 $ 49,834 $ 38,171
Percentage of total brokerage commissions paid to Prudential
Securities................................................................... 5.9% 5.5% 5.3%
</TABLE>
The Fund effected approximately 7.7% 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-21
<PAGE>
$735,333 and $745,713 (or 78.3% and 85.5%), 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..... $12.04 $ 12.48
Maximum sales charge (5% of offering price)................ .63 .66
--------- ------
Maximum offering price to public........................... $12.67 $ 13.14
--------- ------
--------- ------
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $12.00 $ 12.41
--------- ------
--------- ------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $12.00 $ 12.41
--------- ------
--------- ------
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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>
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a portfolio of the Fund) may be included in
a mutual fund program with other Prudential Mutual Funds. Under such a program,
a group of portfolios will be selected and thereafter 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. The Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the 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-28
<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
For federal tax purposes, each Portfolio is treated as a separate taxable
entity. 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. 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 that Portfolio.
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).
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-29
<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-30
<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
7.98%, 9.87% and 10.17% for the Balanced Portfolio and 8.25%, 9.35% and 9.56%
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 7.79%, 10.02% and 8.53% for the Balanced
Portfolio and 8.05%, 9.47% and 8.43% 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 11.53% and 11.80% 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 13.67%,
18.51% and 79.62% for the Balanced Portfolio and 13.95%, 64.60% and 74.19% 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 12.79%, 62.22% and 90.57% for the Balanced
Portfolio and 13.05%, 58.18% and 89.18% for the Strategy Portfolio,
respectively. The aggregate total return for Class C shares for the one year
period ended July 31, 1995 was 12.49% and 12.75% 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.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
B-31
<PAGE>
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 1.93% and 2.14%
for the Class A shares of the Balanced Portfolio and the Strategy Portfolio,
respectively; and 1.29% and 1.51% for the Class B shares of the Balanced
Portfolio and the Strategy Portfolio, respectively; and 1.35% and 1.52% 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 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.
B-32
<PAGE>
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-33
<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 $1,396,000
($711,000--Balanced Portfolio and $685,000--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-34
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 BALANCED PORTFOLIO*
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- -------------------------------------------------------------------------
LONG-TERM INVESTMENTS--86.1%
COMMON STOCKS--55.0%
- --------------------------------------------------------------------------
Aerospace/Defense--1.1%
60,000 Boeing Co. $ 4,020,000
116,400 Gencorp, Inc. 1,353,150
-------------
5,373,150
- ------------------------------------------------------------
Automotive--0.8%
150,000 Ford Motor Co. 4,331,250
- ------------------------------------------------------------
Chemicals--0.9%
140,000 Agrium Inc. (Canada) 4,869,964
- ------------------------------------------------------------
Computer & Related Equipment--9.5%
135,000 Bay Networks* 6,058,125
80,000 Cisco Systems, Inc.* 4,450,000
50,000 Compaq Computer Corp.* 2,537,500
222,000 EMC Corp.* 5,078,250
100,000 Intel Corp. 6,500,000
85,000 Motorola, Inc. 6,513,125
172,500 Network Express, Inc.* 3,212,812
117,800 Quad Systems Corp.* 1,060,200
130,000 Seagate Technology* 5,768,750
160,000 Sun Microsystems, Inc.* 7,700,000
-------------
48,878,762
- ------------------------------------------------------------
Consumer Products--0.6%
158,500 Whitman Corp. 3,090,750
- ------------------------------------------------------------
Containers & Packaging--0.7%
160,000 Stone Container Corp.* 3,460,000
- ------------------------------------------------------------
Drugs & Health Care--5.3%
100,000 Columbia Healthcare Corp. 4,900,000
100,000 Forest Laboratories, Inc.* 4,437,500
35,000 Johnson & Johnson Co. 2,511,250
119,800 Physician Corp. of America* 1,957,981
70,000 St. Jude Medical, Inc. $ 3,832,500
50,100 Tenet Healthcare Corp. 764,025
133,800 U.S. HealthCare, Inc. 4,231,425
117,400 Ventritex, Inc.* 1,871,063
50,000 Zeneca Group PLC (United Kingdom) 2,668,750
-------------
27,174,494
- ------------------------------------------------------------
Electronics--5.4%
25,300 ADT Ltd.* 303,600
35,000 Applied Materials, Inc.* 3,622,500
77,000 Integrated Device Technology, Inc.* 4,822,125
51,000 KLA Instruments Corp.* 4,424,250
60,000 Loral Corp. 3,360,000
43,700 MEMC Electronic Materials, Inc.* 1,316,463
98,400 Tencor Instruments* 4,329,600
185,500 VLSI Technology, Inc.* 5,495,437
-------------
27,673,975
- ------------------------------------------------------------
Financial Services--6.5%
138,800 Ahmanson (H.F.) & Co. 3,105,650
70,000 Citicorp 4,366,250
124,500 Dean Witter Discover & Co. 6,287,250
60,900 Federal National Mortgage Association 5,701,762
85,000 NationsBank Corp. 4,770,625
47,300 Republic New York Corp. 2,648,800
130,000 Salomon, Inc. 4,793,750
166,600 Western National Corp. 1,978,375
-------------
33,652,462
- ------------------------------------------------------------
Home Improvements--1.2%
115,000 Owens-Corning Fiberglass* 4,513,750
119,400 Ply Gem Industries, Inc. 1,850,700
-------------
6,364,450
- ------------------------------------------------------------
Hotels & Leisure--0.6%
144,700 Carnival Corp. 3,273,838
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-35
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 BALANCED PORTFOLIO*
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- --------------------------------------------------------------
Insurance--6.1%
35,400 Berkley (W. R.) Corp. $ 1,358,475
26,900 Chubb Corp. 2,243,702
57,300 Emphesys Financial Group, Inc. 1,640,213
210,000 Equitable Cos., Inc. 4,698,750
90,000 Equitable of Iowa Cos. 2,925,000
75,800 PMI Group Inc. 3,524,700
163,600 SunAmerica, Inc. 9,366,100
119,400 Travelers Corp. 5,656,575
-------------
31,413,515
- ------------------------------------------------------------
Machinery & Equipment--0.9%
44,100 Regal Beloit Corp. 904,050
225,000 Smith International, Inc.* 3,825,000
-------------
4,729,050
- ------------------------------------------------------------
Mining--0.7%
300,000 Santa Fe Pacific Gold Corp.* 3,750,000
- ------------------------------------------------------------
Oil & Gas--3.3%
106,200 Cabot Corp. 1,486,800
148,000 Mesa, Inc.* 629,000
187,300 Noble Drilling Corp.* 1,217,450
157,300 Oryx Energy Co. 2,261,187
44,700 Parker & Parsley Petroleum Co. 866,063
143,600 Repsol S.A. (ADR) (Spain) 4,792,650
89,000 Seagull Energy Corp.* 1,590,875
222,000 YPF Sociedad Anonima (ADS)
(Argentina) 3,857,250
-------------
16,701,275
- ------------------------------------------------------------
Petroleum Services--2.2%
230,000 BJ Services Corp.* 5,721,250
75,000 Exxon Corp. 5,437,500
-------------
11,158,750
- ------------------------------------------------------------
Realty Investment Trust--0.3%
92,200 Manufactured Home Community, Inc. $ 1,463,675
- ------------------------------------------------------------
Retail--1.0%
152,700 Caldor Corp.* 2,080,538
106,000 Dillard Department Stores, Inc. 3,286,000
-------------
5,366,538
- ------------------------------------------------------------
Software--2.5%
121,600 Baan Company N.V.* (Netherlands) 4,058,400
60,000 Computer Associates International,
Inc. 4,402,500
50,000 Microsoft Corp.* 4,525,000
-------------
12,985,900
- ------------------------------------------------------------
Steel & Metals--0.9%
150,000 National Steel Corp.* 2,400,000
70,000 Trinity Industries, Inc. 2,345,000
-------------
4,745,000
- ------------------------------------------------------------
Telecommunications--2.4%
62,100 AirTouch Communications* 1,956,150
200,000 NEXTEL Communications, Inc.* 3,875,000
152,800 Tele-Communications, Inc.* 3,820,000
75,000 Telefonos de Mexico, Series A (ADR)
(Mexico) 2,475,000
-------------
12,126,150
- ------------------------------------------------------------
Textiles--1.0%
220,000 Fruit of the Loom, Inc.* 5,087,500
- ------------------------------------------------------------
Tobacco--1.1%
200,000 RJR Nabisco Holdings Corp. 5,525,000
-------------
Total common stocks (cost
$245,361,408) 283,195,448
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-36
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 BALANCED PORTFOLIO*
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- --------------------------------------------------------------------------
DEBT OBLIGATIONS--31.1%
CORPORATE BONDS--6.6%
- ------------------------------------------------------------
Electronics--0.4%
Westinghouse Electric Corp.,
Ba1 $ 2,500 6.875%, 9/1/03 $ 2,280,825
- ------------------------------------------------------------
Financial Services--2.3%
Associates Corp. of North
America,
Aa3 750 6.875%, 1/15/97 756,172
Aa3 200 8.375%, 1/15/98, Sr. Note, 208,290
Financiera Energetica
Nacional (Columbia)
BBB-# 900 6.625%, 12/13/96 893,250
First Union Corp., Sub.
Note,
A3 1,000 9.45%, 6/15/99 1,082,240
Ford Motor Credit Co.,
A1 5,000 7.75%, 3/15/05 5,212,800
Kansallis-Osake-Pankki
Bank, (Finland)
A3 1,000 6.125%, 5/15/98 989,850
Ba1 1,000 8.65%, 12/29/49 1,042,500
PT Alatief Freeport
Finance, Sr. Note,
(Netherlands)
Ba2 1,400 9.75%, 4/15/01 1,414,000
------------
11,599,102
- ------------------------------------------------------------
Food & Beverage--0.1%
Coca Cola Enterprises,
Inc.,
A3 500 6.50%, 11/15/97 502,995
- ------------------------------------------------------------
Media--0.3%
Grupo Televisa, Sa De
Euro, (MTN) (Mexico)
Ba2 1,400 10.00%, 11/9/97 1,317,750
Oil & Gas--0.2%
Arkla, Inc., (MTN)
Ba1 $ 1,000 9.30%, 1/15/98 $ 1,038,270
- ------------------------------------------------------------
Petroleum Services--0.2%
Empresa De Petroleos,
(Columbia)
BBB-# 1,000 7.25%, 7/8/98 980,000
- ------------------------------------------------------------
Retail--1.0%
K Mart Corp.,
Baa1 5,000 8.125%, 12/1/06 5,084,650
- ------------------------------------------------------------
Shipping--0.2%
Compania SudAmericana
De Vapores, (Chile)
BBB-# 1,100 7.375%, 12/8/03 1,039,500
- ------------------------------------------------------------
Tobacco--0.9%
RJR Nabisco, Inc.,
Baa3 5,000 7.625%, 9/15/03 4,872,600
- ------------------------------------------------------------
Tourism/Resorts--1.0%
Royal Caribbean Cruises
Ltd.,
Baa3 5,000 8.25%, 4/1/05 5,187,750
------------
Total corporate bonds
(cost $33,379,339) 33,903,442
- ------------------------------------------------------------
SOVEREIGN BONDS--0.2%
- ------------------------------------------------------------
United Mexican States,
(Mexico)
Ba2 1,225 8.50%, 9/15/02
(cost $1,122,069) 1,022,875
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 BALANCED PORTFOLIO*
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<C> <C> <S> <C>
- --------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--24.3%
United States Treasury
Bonds,
$ 30,000 7.625%, 2/15/25 $ 32,901,600
United States Treasury
Notes,
40,000 6.125%, 7/31/00 39,943,600
20,000 6.50%, 5/15/05 20,090,600
30,100 7.50%, 2/15/05 32,263,287
------------
Total U. S. government
securities
(cost $124,551,018) 125,199,087
------------
Total debt obligations
(cost $159,052,426) 160,125,404
------------
Total long-term
investments (cost
$404,413,834) 443,320,852
------------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--12.6%
CORPORATE NOTES--0.9%
- ------------------------------------------------------------
Cemex S.A., (Mexico)
NR 750 6.25%, 10/25/95 765,000
Grupo Condumex S.A. de
C.V., (Mexico) (MTN)
NR 400 6.25%, 7/27/96 372,000
Union Bank Finland, Ltd.,
(Finland)
A2 2,600 5.25%, 6/15/96 2,569,788
Westinghouse Credit Corp.,
(MTN)
Ba1 $ 400 8.75%, 6/3/96 $ 406,144
Westinghouse Electric
Corp.,
Ba1 450 8.70%, 6/20/96 457,196
------------
Total corporate notes
(cost $4,651,369) 4,570,128
- ------------------------------------------------------------
REPURCHASE AGREEMENT--11.7%
60,491 Joint Repurchase Agreement
Account,
5.82%, 8/1/95, (Note 5) 60,491,000
------------
Total short-term
investments (cost
$65,142,369) 65,061,128
- ------------------------------------------------------------
Total Investments--98.7%
(cost $469,556,203; Note
4) 508,381,980
Other assets in excess of
liabilities--1.3% 6,783,070
------------
Net Assets--100% $515,165,050
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
# S&P rating.
ADR--American Depository Receipt.
ADS--American Depository Shares.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL ALLOCATION FUND
Statement of Assets and Liabilities BALANCED PORTFOLIO*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets July 31, 1995
Investments, at value (cost $469,556,203).................................................................... $508,381,980
Receivable for investments sold.............................................................................. 22,637,791
Receivable for Fund shares sold.............................................................................. 5,289,720
Dividends and interest receivable............................................................................ 3,431,481
Deferred expenses............................................................................................ 10,579
------------
Total assets.............................................................................................. 539,751,551
------------
Liabilities
Bank overdraft............................................................................................... 8,566
Payable for investments purchased............................................................................ 23,092,390
Payable for Fund shares reacquired........................................................................... 656,792
Distribution fee payable..................................................................................... 356,645
Management fee payable....................................................................................... 280,037
Accrued expenses............................................................................................. 192,071
------------
Total liabilities......................................................................................... 24,586,501
------------
Net Assets................................................................................................... $515,165,050
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 429,002
Paid-in capital in excess of par.......................................................................... 454,815,020
------------
455,244,022
Undistributed net investment income....................................................................... 1,914,605
Accumulated net realized gain on investments.............................................................. 19,180,646
Net unrealized appreciation on investments................................................................ 38,825,777
------------
Net Assets, July 31, 1995.................................................................................... $515,165,050
------------
------------
Class A:
Net asset value and redemption price per share
($119,828,557 / 9,951,069 shares of beneficial interest issued and outstanding)........................ $12.04
Maximum sales charge (5% of offering price)............................................................... .63
------------
Maximum offering price to public.......................................................................... $12.67
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($392,290,710 / 32,695,277 shares of beneficial interest issued and outstanding)....................... $12.00
------------
------------
Class C:
Net asset value, offering price and redemption price per share
($3,045,783 / 253,825 shares of beneficial interest issued and outstanding)............................ $12.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL ALLOCATION FUND
BALANCED PORTFOLIO*
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1995
<S> <C>
Income
Interest $ 16,851,017
Dividends (net of foreign withholding taxes
of $67,443).............................. 3,714,618
-------------
Total income............................. 20,565,635
-------------
Expenses
Distribution fee--Class A................... 174,385
Distribution fee--Class B................... 4,094,190
Distribution fee--Class C................... 9,153
Management fee.............................. 3,120,574
Transfer agent's fees and expenses.......... 972,000
Reports to shareholders..................... 264,000
Custodian's fees and expenses............... 159,000
Registration fees........................... 71,000
Legal fees.................................. 26,000
Trustees' fees and expenses................. 22,300
Audit fee and expenses...................... 16,500
Insurance................................... 13,700
Miscellaneous............................... 6,282
-------------
Total expenses........................... 8,949,084
-------------
Net investment income.......................... 11,616,551
-------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions..................... 24,868,871
Foreign currency transactions............... (13,031)
-------------
24,855,840
Net change in unrealized appreciation on
investments................................. 21,889,387
-------------
Net gain on investments........................ 46,745,227
-------------
Net Increase in Net Assets Resulting
from Operations................................ $ 58,361,778
-------------
-------------
</TABLE>
PRUDENTIAL ALLOCATION FUND
BALANCED PORTFOLIO*
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended July 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income......... $ 11,616,551 $ 8,998,851
Net realized gain on
investments and foreign
currency transactions...... 24,855,840 8,854,437
Net change in unrealized
appreciation (depreciation)
of investments............. 21,889,387 (13,575,563)
------------- ------------
Net increase in net assets
resulting from
operations................. 58,361,778 4,277,725
------------- ------------
Net equalization credits
(debits)...................... (108,882) 1,077,644
------------- ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A.................... (2,234,935) (970,829)
Class B.................... (9,204,130) (9,728,864)
Class C.................... (21,646) --
------------- ------------
(11,460,711) (10,699,693)
------------- ------------
Distributions to shareholders
from net realized gains on
investment transactions
Class A.................... (701,041) (1,247,471)
Class B.................... (7,720,336) (16,812,829)
Class C.................... (13,746) --
------------- ------------
(8,435,123) (18,060,300)
------------- ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
subscribed................. 177,082,017 216,417,990
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions.......... 18,598,887 26,617,480
Cost of shares reacquired..... (201,993,090) (80,947,022)
------------- ------------
Net increase (decrease) in net
assets from Fund shares
transactions............... (6,312,186) 162,088,448
------------- ------------
Total increase................... 32,044,876 138,683,824
Net Assets
Beginning of year................ 483,120,174 344,436,350
------------- ------------
End of year...................... $ 515,165,050 $483,120,174
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-40
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 STRATEGY PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
-----------------------------------------------------------------
LONG-TERM INVESTMENTS--89.2%
COMMON STOCKS--60.1%
- ------------------------------------------------------------------
Aerospace/Defense--0.9%
51,000 Boeing Co. $ 3,417,000
- ------------------------------------------------------------
Automotive--1.1%
140,000 Ford Motor Co. 4,042,500
- ------------------------------------------------------------
Chemicals--1.3%
130,000 Agrium Inc. (Canada) 4,522,110
- ------------------------------------------------------------
Computer & Related Equipment--10.1%
100,000 Bay Networks* 4,487,500
70,000 Cisco Systems, Inc.* 3,893,750
45,000 Compaq Computer Corp.* 2,283,750
164,000 EMC Corp.* 3,751,500
75,000 Intel Corp. 4,875,000
65,000 Motorola, Inc. 4,980,625
135,500 Network Express, Inc.* 2,523,687
94,200 Quad Systems Corp.* 847,800
72,000 Seagate Technology* 3,195,000
130,000 Sun Microsystems, Inc.* 6,256,250
-------------
37,094,862
- ------------------------------------------------------------
Containers & Packaging--0.8%
140,000 Stone Container Corp.* 3,027,500
- ------------------------------------------------------------
Drugs & Health Care--6.3%
86,000 Columbia Healthcare Corp. 4,214,000
90,000 Forest Laboratories, Inc.* 3,993,750
63,900 Health Care & Retirement Corp.* 2,044,800
27,500 Johnson & Johnson Co. 1,973,125
102,100 Physician Corp. of America* 1,668,697
64,700 St. Jude Medical, Inc. 3,542,325
21,600 Tenet Healthcare Corp. 329,400
113,500 U.S. HealthCare, Inc. $ 3,589,437
102,900 Ventritex, Inc.* 1,639,969
-------------
22,995,503
- ------------------------------------------------------------
Electronics--6.3%
29,000 ADT Ltd.* 348,000
25,000 Applied Materials, Inc.* 2,587,500
40,000 General Electric Co. 2,360,000
59,000 Integrated Device Technology, Inc.* 3,694,875
40,000 KLA Instruments Corp.* 3,470,000
30,100 Loral Corp. 1,685,600
34,100 MEMC Electronic Materials, Inc.* 1,027,262
79,300 Tencor Instruments* 3,489,200
145,000 VLSI Technology, Inc.* 4,295,625
-------------
22,958,062
- ------------------------------------------------------------
Financial Services--7.4%
121,300 Ahmanson ( H.F.) & Co. 2,714,088
70,000 Citicorp 4,366,250
88,300 Dean Witter Discover & Co. 4,459,150
54,100 Federal National Mortgage Assn. 5,065,112
75,000 NationsBank Corp. 4,209,375
43,200 Republic New York Corp. 2,419,200
105,000 Salomon, Inc. 3,871,875
-------------
27,105,050
- ------------------------------------------------------------
Home Improvements--0.9%
65,000 Owens-Corning Fiberglass* 2,551,250
50,000 Ply Gem Industries, Inc. 775,000
-------------
3,326,250
- ------------------------------------------------------------
Hotels & Leisure--1.1%
179,800 Carnival Corp. 4,067,975
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 STRATEGY PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
Information Services--0.5%
59,900 American Business Information, Inc.* $ 1,849,413
- ------------------------------------------------------------
Insurance--5.7%
10,200 Berkley (W. R.) Corp. 391,425
21,400 Chubb Corp. 1,784,953
160,000 Equitable Cos., Inc. 3,580,000
65,700 PMI Group, Inc. 3,055,050
135,400 SunAmerica, Inc. 7,751,650
89,700 Travelers Corp. 4,249,537
-------------
20,812,615
- ------------------------------------------------------------
Mining--1.0%
300,000 Santa Fe Pacific Gold Corp.* 3,750,000
- ------------------------------------------------------------
Oil & Gas--2.7%
105,900 Mesa, Inc.* 450,075
159,000 Noble Drilling Corp.* 1,033,500
118,900 Repsol S.A. (ADR) (Spain) 3,968,287
52,400 Seagull Energy Corp.* 936,650
190,000 YPF Sociedad Anonima (ADS)
(Argentina) 3,301,250
-------------
9,689,762
- ------------------------------------------------------------
Petroleum Services--3.5%
176,000 BJ Services Corp.* 4,378,000
70,000 Exxon Corp. 5,075,000
200,000 Smith International, Inc.* 3,400,000
-------------
12,853,000
- ------------------------------------------------------------
Realty Investment Trust--0.4%
97,300 Manufactured Home Community, Inc. 1,544,638
- ------------------------------------------------------------
Retail--1.3%
132,100 Caldor Corp.* $ 1,799,863
93,000 Dillard Department Stores, Inc. 2,883,000
-------------
4,682,863
- ------------------------------------------------------------
Software--2.9%
97,700 Baan Company* (Netherlands) 3,260,738
50,000 Computer Associates International,
Inc. 3,668,750
42,000 Microsoft Corp.* 3,801,000
-------------
10,730,488
- ------------------------------------------------------------
Steel--1.2%
150,000 National Steel Corp.* 2,400,000
60,000 Trinity Industries, Inc. 2,010,000
-------------
4,410,000
- ------------------------------------------------------------
Telecommunications--2.3%
58,500 AirTouch Communications* 1,842,750
150,000 NEXTEL Communications, Inc.* 2,906,250
52,779 Tele-Communications, Inc.* 1,319,475
75,000 Telefonos de Mexico, Series A (ADR)
(Mexico) 2,475,000
-------------
8,543,475
- ------------------------------------------------------------
Textiles--1.3%
200,000 Fruit of the Loom, Inc.* 4,625,000
- ------------------------------------------------------------
Tobacco--1.1%
150,000 RJR Nabisco Holdings Corp. 4,143,750
-------------
Total common stocks (cost
$185,945,464) 220,191,816
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
PRUDENTIAL ALLOCATION FUND
Portfolio of Investments as of July 31, 1995 STRATEGY PORTFOLIO
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <C> <S> <C>
- ---------------------------------------------------------------------
DEBT OBLIGATIONS--29.1%
SOVEREIGN BONDS--3.3%
Argentina Gov't. Bond,
(Argentina)
$ 13,950 Zero Coupon, 9/1/97 $ 6,856,188
German Government Bonds,
(Germany)
7,000 7.375%, 1/3/05 5,259,382
------------
Total (cost $12,277,470) 12,115,570
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--25.8%
United States Treasury
Notes,
43,000 7.50%, 2/15/05 46,090,410
United States Treasury
Bonds,
44,000 7.625%, 2/15/25 48,255,680
------------
Total U.S. Government
Securities
(cost $94,448,437) 94,346,090
------------
Total debt obligations
(cost $106,725,907) 106,461,660
------------
Total long-term
investments
(cost $292,671,371) 326,653,476
------------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--11.8%
SOVEREIGN BONDS--0.6%
- ------------------------------------------------------------
Mexican Tesobonos,
(Mexico)
2,348 Zero Coupon, 12/7/95 2,274,643
- ------------------------------------------------------------
REPURCHASE AGREEMENT--11.2%
Joint Repurchase
Agreement Account,
5.82%, 8/1/95, (Note 5) $ 40,800,000
$ 40,800
------------
Total short-term
investments
(cost $43,078,628) 43,074,643
- ------------------------------------------------------------
Total Investments--101.0%
(cost $335,749,999; Note
4) 369,728,119
Liabilities in excess of
other assets--(1.0%) (3,644,178)
------------
Net Assets--100% $366,083,941
------------
------------
<FN>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
ADS--American Depository Share.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
PRUDENTIAL ALLOCATION FUND
Statement of Assets and Liabilities STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets July 31, 1995
Investments, at value (cost $335,749,999).................................................................... $369,728,119
Cash......................................................................................................... 34,950
Receivable for investments sold.............................................................................. 16,703,011
Dividends and interest receivable............................................................................ 3,379,850
Receivable for Fund shares sold.............................................................................. 219,527
Deferred expenses and other assets........................................................................... 20,288
------------
Total assets............................................................................................. 390,085,745
------------
Liabilities
Payable for investments purchased............................................................................ 22,560,918
Payable for Fund shares reacquired........................................................................... 784,384
Distribution fee payable..................................................................................... 256,290
Management fee payable....................................................................................... 202,682
Accrued expenses............................................................................................. 197,530
------------
Total liabilities........................................................................................ 24,001,804
------------
Net Assets................................................................................................... $366,083,941
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 294,618
Paid-in capital in excess of par.......................................................................... 315,051,415
------------
315,346,033
Undistributed net investment income....................................................................... 1,539,281
Accumulated net realized gain on investments.............................................................. 15,225,530
Net unrealized appreciation on investments................................................................ 33,973,097
------------
Net Assets, July 31, 1995.................................................................................... $366,083,941
------------
------------
Class A:
Net asset value and redemption price per share
($87,081,211 / 6,978,363 shares of beneficial interest issued and outstanding)......................... $12.48
Maximum sales charge (5.00% of offering price)............................................................ .66
------------
Maximum offering price to public.......................................................................... $13.14
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($278,713,976 / 22,460,135 beneficial interest issued and outstanding)................................. $12.41
------------
------------
Class C:
Net asset value, offer price and redemption price per share
($288,754 / 23,269 shares of beneficial interest issued and outstanding)............................... $12.41
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1995
<S> <C>
Income
Interest.................................... $ 10,989,653
Dividends (net of foreign withholding taxes
of $58,427).............................. 3,814,245
-------------
Total income............................... 14,803,898
-------------
Expenses
Distribution fee--Class A................... 142,549
Distribution fee--Class B................... 3,074,388
Distribution fee--Class C................... 1,692
Management fee.............................. 2,370,080
Transfer agent's fees and expenses.......... 1,024,000
Reports to shareholders..................... 222,000
Custodian's fees and expenses............... 204,000
Registration fees........................... 56,500
Legal fees.................................. 26,000
Trustees' fees and expenses................. 22,300
Audit fee and expenses...................... 16,500
Insurance expenses.......................... 11,700
Miscellaneous............................... 985
-------------
Total expenses............................. 7,172,694
-------------
Net investment income.......................... 7,631,204
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions..................... 16,396,551
Financial futures contracts................. (1,010,688)
Foreign currency transactions............... 326,751
-------------
15,712,614
-------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................. 20,549,622
Financial futures contracts................. 467,750
Foreign currency transactions............... (348,855)
-------------
20,668,517
-------------
Net gain on investments........................ 36,381,131
-------------
Net Increase in Net Assets Resulting from
Operations..................................... $ 44,012,335
-------------
-------------
</TABLE>
PRUDENTIAL ALLOCATION FUND
STRATEGY PORTFOLIO
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended July 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income......... $ 7,631,204 $ 7,171,844
Net realized gain on
investments................ 15,712,614 14,878,620
Net change in unrealized
appreciation (depreciation)
of investments............. 20,668,517 (13,682,115)
------------- ------------
Net increase in net assets
resulting from
operations................. 44,012,335 8,368,349
------------- ------------
Net equalization credits
(debits)...................... (274,536) 48,191
------------- ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A.................... (1,553,405) (549,810)
Class B.................... (5,542,190) (4,811,597)
Class C.................... (3,515) --
------------- ------------
(7,099,110) (5,361,407)
------------- ------------
Distributions to shareholders
from net realized gains on
investment 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)
------------- ------------
Distributions to shareholders
in excess of net investment
income
Class A.................... -- (40,192)
Class B.................... -- (351,923)
Class C.................... -- --
------------- ------------
-- (392,115)
------------- ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
subscribed................. 87,194,600 76,851,235
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions.......... 17,309,043 15,914,742
Cost of shares reacquired..... (147,769,905) (86,835,010)
------------- ------------
Net increase (decrease) in net
assets from Fund share
transactions............... (43,266,262) 5,930,967
------------- ------------
Total decrease................... (17,540,603) (2,304,012)
Net Assets
Beginning of year................ 383,624,544 385,928,556
------------- ------------
End of year...................... $ 366,083,941 $383,624,544
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
Notes to Financial Statements PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
Prudential Allocation Fund, (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 Balanced Portfolio* and the
Strategy Portfolio. The investment objective of the Balanced 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 Balanced Portfolio* through varying the
proportions of investments in debt and equity securities, the quality and
maturity of debt securities purchased and the price volatility and the type of
issuer of equity securities purchased. The ability of issuers of debt securities
held by the Fund to meet their obligations may be affected by economic
developments in a specific country, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Options are valued at
the mean between the most recently quoted bid and asked prices. Futures and
options thereon are valued at their last sales price as of the close of the
commodities exchange or board of trade.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of long-term securities held at the end of the fiscal period. Similarly,
the Fund does not isolate the effect of changes in foreign exchange rates from
the fluctuations arising from changes in the market prices of long-term
portfolio securities sold during the fiscal period. Accordingly, realized
foreign currency gains (losses) are included in the reported net realized gains
on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, and
the difference between the amounts of dividends, interest and foreign taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid.
- --------------------------------------------------------------------------------
*See Note 8.
B-46
<PAGE>
Notes to Financial Statements PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
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 currency transactions.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the 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 year ended July 31, 1995, the Strategy Portfolio decreased undistributed net
investment income and increased accumulated net realized gain on investments by
$265,496. 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.
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 year ended July 31,
1995.
PMFD has advised the Fund that it has received approximately $440,000
($254,000--Balanced Portfolio* and $186,000--Strategy Portfolio) in front-end
sales charges resulting from sales of Class A shares during the
- --------------------------------------------------------------------------------
*See Note 8.
B-47
<PAGE>
Notes to Financial Statements PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
year ended July 31, 1995. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
PSI advised the Fund that for the year ended July 31, 1995 it received
approximately $1,677,500 ($963,500--Balanced Portfolio* and $714,000--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 Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended July 31, 1995,
the Fund incurred fees of approximately $1,396,000 ($711,000--Balanced
Portfolio* and $685,000--Strategy Portfolio) for the services of PMFS. As of
July 31, 1995, approximately $118,000 ($62,000--Balanced Portfolio* and
$56,000--Strategy Portfolio) of such fees were due to PMFS. Transfer agent fees
and expenses in the Statement of Operations also include certain out of pocket
expenses paid to non-affiliates.
For the year ended July 31, 1995, PSI received approximately $106,500
($47,400--Balanced Portfolio* and $59,100--Strategy Portfolio) in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended July 31, 1995, were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
- ---------------------------------- ------------- -------------
<S> <C> <C>
Balanced Portfolio*............... $ 806,898,931 $ 800,641,319
Strategy Portfolio................ $ 576,378,735 $ 532,216,646
</TABLE>
The cost basis of investments for federal income tax purposes as of July 31,
1995 was $469,592,939 and $335,765,352 for the Balanced Portfolio* and the
Strategy Portfolio, respectively, and net and gross unrealized appreciation of
investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Balanced Strategy
Portfolio* Portfolio
------------ -----------
<S> <C> <C>
Gross unrealized appreciation...... $ 49,713,371 $39,725,210
Gross unrealized depreciation...... (10,924,330) (5,762,443)
------------ -----------
Net unrealized appreciation........ $ 38,789,041 $33,962,767
------------ -----------
------------ -----------
</TABLE>
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Government or federal agency obligations. As of July 31, 1995, the Fund
had a 12.7% (Balanced Portfolio*--7.6% and Strategy Portfolio--5.1%) undivided
interest in the repurchase agreements in the joint account. The undivided
interest for the Fund represented $101,291,000 (Balanced Portfolio*--$60,491,000
and Strategy Portfolio--$40,800,000) 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., 5.82%, dated 7/31/95, in the principal amount of
$265,000,000, repurchase price $265,042,842, due 8/1/95. The value of the
collateral including accrued interest is $270,429,672.
CS First Boston Corp., 5.82%, dated 7/31/95, in the principal amount of
$265,000,000, repurchase price $265,042,842, due 8/1/95. The value of the
collateral including accrued interest is $270,382,812.
Smith Barney Inc., 5.82%, dated 7/31/95, in the principal amount of $265,000,000
repurchase price $265,042,842 due 8/1/95. The value of the collateral including
accrued interest is $270,382,812.
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
*See Note 8.
B-48
<PAGE>
Notes to Financial Statements PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
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 fiscal years ended July
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Balanced Portfolio*: Strategy Portfolio:
Class A Class A
------------------------------- -------------------------------
Year Ended July 31, 1995 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares issued............................................ 3,862,947 $ 44,308,109 1,390,817 $ 15,562,421
Shares issued in reinvestment of dividends and
distributions.......................................... 251,790 2,763,092 226,669 2,532,533
Shares reacquired........................................ (3,252,889) (37,646,830) (1,480,078) (17,030,049)
----------- ------------- ----------- -------------
Net increase in shares outstanding before conversion..... 861,848 9,424,371 137,408 1,064,905
Shares issued upon conversion from Class B............... 5,717,102 62,038,822 4,041,405 45,163,786
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 6,578,950 $ 71,463,193 4,178,813 $ 46,228,691
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<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 and
distributions.......................................... 185,818 2,104,551 115,925 1,362,807
Shares reacquired........................................ (673,143) (7,607,829) (693,445) (8,199,850)
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 1,448,796 $ 16,565,566 376,598 $ 4,372,711
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<CAPTION>
Class B Class B
------------------------------- -------------------------------
Year Ended July 31, 1995 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares issued............................................ 5,899,203 $ 65,629,606 2,294,936 $ 26,157,592
Shares issued in reinvestment of dividends and
distributions.......................................... 1,480,760 15,800,410 1,357,022 14,767,213
Shares reacquired........................................ (9,125,344) (100,071,801) (7,554,633) (85,523,598)
----------- ------------- ----------- -------------
Net decrease in shares outstanding before conversion..... (1,745,381) (18,641,785) (3,902,675) (44,598,793)
Shares reacquired upon conversion into Class A........... (5,738,270) (62,038,822) (4,066,519) (45,163,786)
----------- ------------- ----------- -------------
Net decrease in shares outstanding....................... (7,483,651) $ (80,680,607) (7,969,194) $ (89,762,579)
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
B-49
<PAGE>
Notes to Financial Statements PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balanced Portfolio*: Strategy Portfolio:
Class B Class B
------------------------------- -------------------------------
Year Ended July 31, 1994 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<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)
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 12,713,844 $ 145,522,882 115,053 $ 1,558,256
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<CAPTION>
Class C Class C
------------------------------- -------------------------------
August 1, 1994* Through July 31, 1995 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares issued............................................ 442,652 $ 5,105,480 26,928 $ 310,801
Shares issued in reinvestment of dividends and
distributions.......................................... 3,269 35,385 850 9,297
Shares reacquired........................................ (192,096) (2,235,637) (4,509) (52,472)
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 253,825 $ 2,905,228 23,269 $ 267,626
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
- ------------------------------------------------------------
Note 7. Dividends
On September 7, 1995, the Board of Trustees of the Fund declared a dividend from
undistributed net investment income of $.0675 per share to Class A shareholders
and $.0450 per share to Class B shareholders and Class C shareholders for the
Balanced Portfolio* and a dividend from undistributed net investment income of
$.0675 per share to Class A shareholders and $.0450 per share to Class B
shareholders, and Class C shareholders for the Strategy Portfolio. All dividends
are payable on September 15, 1995 to shareholders of record on September 12,
1995.
- ------------------------------------------------------------
Note 8. Subsequent Events
On May 3, 1995, the Board of Trustees of the Fund approved a name change for
the Conservatively Managed Portfolio to the Balanced Portfolio. On
September 6, 1995, the shareholders of the Prudential IncomeVertible-Registered
Trademark- Fund, Inc. approved the merger into the Balanced Portfolio. Both
changes are effective September 29, 1995.
- --------------------------------------------------------------------------------
*See Note 8.
B-50
<PAGE>
PRUDENTIAL ALLOCATION FUND
Financial Highlights BALANCED PORTFOLIO*
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the years indicated:
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23
-------- ------- ------- ------- ------
Income from investment operations
Net investment income......................... .34 .33 .43 .44 .44
Net realized and unrealized gain (loss) on
investment transactions.................... 1.11 (.05) 1.16 .81 .73
-------- ------- ------- ------- ------
Total from investment operations........... 1.45 .28 1.59 1.25 1.17
-------- ------- ------- ------- ------
Less distributions
Dividends from net investment income.......... (.33) (.37) (.37) (.44) (.44)
Distributions paid to shareholders from net
realized gains on investment
transactions............................... (.20) (.54) (.47) (.54) (.23)
-------- ------- ------- ------- ------
Total distributions........................ (.53) (.91) (.84) (.98) (.67)
-------- ------- ------- ------- ------
Net asset value, end of period................ $ 12.04 $ 11.12 $ 11.75 $ 11.00 $10.73
-------- ------- ------- ------- ------
-------- ------- ------- ------- ------
TOTAL RETURN(a):.............................. 13.67% 2.39% 15.15% 12.29% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $119,829 $37,512 $22,605 $10,944 $4,408
Average net assets (000)...................... $ 69,754 $29,875 $15,392 $ 7,103 $2,747
Ratios to average net assets:
Expenses, including distribution fees...... 1.22% 1.23% 1.17% 1.29% 1.38%
Expenses, excluding distribution fees...... 0.97% 1.00% .97% 1.09% 1.18%
Net investment income...................... 2.90% 2.84% 3.88% 3.97% 4.44%
Portfolio turnover rate....................... 201% 108% 83% 105% 137%
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) 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.
</TABLE>
- --------------------------------------------------------------------------------
*See Note 8.
See Notes to Financial Statements.
B-51
<PAGE>
PRUDENTIAL ALLOCATION FUND
Financial Highlights BALANCED PORTFOLIO*
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ ---------
August 1,
1994(a)
Year Ended July 31, through
------------------------------------------------------------ July 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 11.12
-------- -------- -------- -------- -------- ---------
Income from investment operations
Net investment income......................... .26 .24 .34 .35 .36 .21
Net realized and unrealized gain (loss) on
investment transactions.................... 1.10 (.05) 1.16 .82 .73 1.12
-------- -------- -------- -------- -------- ---------
Total from investment operations........... 1.36 .19 1.50 1.17 1.09 1.33
-------- -------- -------- -------- -------- ---------
Less distributions
Dividends from net investment income.......... (.25) (.28) (.29) (.36) (.37) (.25)
Distributions paid to shareholders from net
realized gains on investment
transactions............................... (.20) (.54) (.47) (.54) (.23) (.20)
-------- -------- -------- -------- -------- ---------
Total distributions........................ (.45) (.82) (.76) (.90) (.60) (.45)
-------- -------- -------- -------- -------- ---------
Net asset value, end of period................ $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 12.00
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
TOTAL RETURN(d):.............................. 12.79% 1.61% 14.27% 11.48% 11.13% 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $392,291 $445,609 $321,831 $225,995 $162,281 $ 3,046
Average net assets (000)...................... $409,419 $392,133 $267,340 $189,358 $149,907 $ 920
Ratios to average net assets:(c)
Expenses, including distribution fees...... 1.97% 2.00% 1.97% 2.09% 2.16% 2.04%(b)
Expenses, excluding distribution fees...... .97% 1.00% .97% 1.09% 1.16% 1.04%(b)
Net investment income...................... 2.34% 2.08% 3.04% 3.25% 3.55% 2.20%(b)
Portfolio turnover rate....................... 201% 108% 83% 105% 137% 201%
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
(d) 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 Note 8.
See Notes to Financial Statements.
B-52
<PAGE>
PRUDENTIAL ALLOCATION FUND
Financial Highlights STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the years indicated:
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended July 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.60 $ 11.82 $ 12.03 $ 11.45 $ 10.50
------- ------- ------- ------- -------
Income from investment operations
Net investment income......................... .38 .30 .42 .35 .38
Net realized and unrealized gain on investment
and foreign currency transactions.......... 1.14 .05 .70 1.02 .98
------- ------- ------- ------- -------
Total from investment operations........... 1.52 .35 1.12 1.37 1.36
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income.......... (.30) (.22) (.37) (.37) (.35)
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........................ (.64) (.57) (1.33) (.79) (.41)
------- ------- ------- ------- -------
Net asset value, end of year.................. $ 12.48 $ 11.60 $ 11.82 $ 12.03 $ 11.45
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a):.............................. 13.95% 2.88% 10.02% 12.36% 13.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $87,081 $32,485 $28,641 $20,378 $10,765
Average net assets (000)...................... $57,020 $30,634 $24,216 $15,705 $ 6,694
Ratios to average net assets:
Expenses, including distribution fees...... 1.33% 1.26% 1.21% 1.26% 1.33%
Expenses, excluding distribution fees...... 1.08% 1.03% 1.01% 1.06% 1.13%
Net investment income...................... 3.34% 2.52% 3.61% 3.05% 3.89%
Portfolio turnover rate....................... 180% 96% 145% 241% 189%
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) 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.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
PRUDENTIAL ALLOCATION FUND
Financial Highlights STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ ---------
August 1,
1994(a)
Year Ended July 31, through
------------------------------------------------------------ July 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 10.49 $ 11.57
-------- -------- -------- -------- -------- ---------
Income from investment operations
Net investment income......................... .20 .21 .34 .26 .30 .25
Net realized and unrealized gain on investment
and foreign currency transactions.......... 1.22 .05 .70 1.02 .97 1.14
-------- -------- -------- -------- -------- ---------
Total from investment operations........... 1.42 .26 1.04 1.28 1.27 1.39
-------- -------- -------- -------- -------- ---------
Less distributions
Dividends from net investment income.......... (.21) (.16) (.30) (.28) (.27) (.21)
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) (.34)
-------- -------- -------- -------- -------- ---------
Total distributions........................ (.55) (.51) (1.26) (.70) (.33) (.55)
-------- -------- -------- -------- -------- ---------
Net asset value, end of period................ $ 12.41 $ 11.54 $ 11.79 $ 12.01 $ 11.43 $ 12.41
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
TOTAL RETURN(d):.............................. 13.05% 2.11% 9.21% 11.53% 12.49% 12.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $278,714 $351,140 $357,287 $314,771 $219,983 $ 289
Average net assets (000)...................... $307,439 $362,579 $339,225 $267,525 $190,913 $ 170
Ratios to average net assets:(c)
Expenses, including distribution fees...... 2.08% 2.03% 2.01% 2.06% 2.11% 2.10%(b)
Expenses, excluding distribution fees...... 1.08% 1.03% 1.01% 1.06% 1.11% 1.10%(b)
Net investment income...................... 1.77% 1.77% 2.79% 2.27% 2.95% 2.27%(b)
Portfolio turnover rate....................... 180% 96% 145% 241% 189% 180%
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
(d) 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-54
<PAGE>
Report of Independent Accountants PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Allocation Fund
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Prudential Allocation Fund (consisting of the
Balanced Portfolio (formerly the Conservatively Managed Portfolio) and the
Strategy Portfolio) as of July 31, 1995, 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, 1995 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 each of the
respective portfolios constituting Prudential Allocation Fund as of July 31,
1995, the results of their operations, the changes in their 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 7, 1995
B-55
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation 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.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
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.
The following chart shows the long term performance of various asset classes and
the rate of inflation.
[GRAPH]
Source: Stocks, Bonds, Bills, and Inflation 1995 yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. 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>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart 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 and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. 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
<TABLE>
<CAPTION>
YEAR 87 88 89 90 91 92
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Treasury Bonds 1...................... 2.0% 7.0% 14.4% 8.5% 15.3% 7.2%
U.S. Government Mortgage Securities 2................. 4.3% 8.7% 15.4% 10.7% 15.7% 7.0%
U.S. Investment Grade Corporate Bonds 3............... 2.0% 9.2% 14.1% 7.1% 18.5% 8.7%
U.S. High Yield Corporate Bonds 4..................... 5.0% 12.5% 0.8% -9.8% 46.2% 15.8%
World Government Bonds 5.............................. 35.2% 2.3% -3.4% 15.3% 16.2% 4.8%
--- --- --- --- --- ---
Difference between highest and lowest return
in percent........................................... 39.2 10.2 18.8 24.9 30.9 11.0
--- --- --- --- --- ---
--- --- --- --- --- ---
<CAPTION>
YTD
YEAR 93 94 5/95
- ------------------------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
U.S. Government Treasury Bonds 1...................... 10.7% -3.4% 10.3%
U.S. Government Mortgage Securities 2................. 8.8% -1.6% 10.1%
U.S. Investment Grade Corporate Bonds 3............... 12.2% -3.9% 12.8%
U.S. High Yield Corporate Bonds 4..................... 17.1% -1.0% 11.7%
World Government Bonds 5.............................. 15.1% 6.0% 19.4%
--- --- ---
Difference between highest and lowest return
in percent........................................... 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>
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>
<S> <C>
Hong Kong 26.5%
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 (MSCI) and Lipper Analytical New
Applications. Used with permission. 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.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
[GRAPH]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
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.
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. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1577 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[GRAPH]
- ------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
Portfolio
Manager's Report
U.S. stock and bond prices generally climbed higher over the last six months.
Virtually all types of stocks rose, driven by strong corporate earnings and
lower interest rates. In late fall, though, technology stocks slipped, while
consumer growth and utility stocks surged higher. The Prudential Allocation
Fund: Balanced Portfolio and Strategy Portfolio each owned significant
technology stock holdings. As a result, both portfolios had a disappointing six
months, finishing behind the S&P 500 Index and the average Lipper Flexible
Portfolio for the reporting period ending January 31, 1996.
Broader Was Better.
Stocks, as measured by Standard & Poor's 500 Stock Index, gained 14.5% over the
last six months and 38.7% for the 12-month period ended January 31, 1996. Over
the same time bonds also scored, rising 7.3% and 17% respectively, according to
the Lehman Brothers Aggregate Index.
The S&P 500's impressive performance masked turbulence in certain sectors of
the market. Technology stocks, for example, led all sectors through the first
half of 1995, but then pulled back toward the end of the year. What caused the
downturn? Investors were concerned about future earnings, mostly because of
reports indicating lower demand for semiconductors.
Bonds also had reason to celebrate over the last six months. Inflation was
subdued enough that the Federal Reserve cut short-term interest rates twice --
in December of 1995, and then again in January of 1996. Bond prices rose as the
30-year Treasury yield declined to 6% in January from 7% last August (bond
yields move in the opposite direction of bond prices).
The Allocation Team.
(PICTURE)
Greg A. Smith, Chief Investment Strategist of Prudential Securities, provides
sector allocation advice for the Strategy Portfolio.
(PICTURE)
Portfolio Manager Greg Goldberg determines the asset allocation for the
Balanced Portfolio and oversees the management of both the Strategy Portfolio
and Balanced Portfolio. Greg follows a "growth" style of investing, selecting
stocks based on their potential to deliver above-average growth in revenues
and earnings.
How Investments Compared.
(As of 1/31/96)
(GRAPH)
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide
12-month total returns for several Lipper mutual fund categories to show you
that reaching for higher yields means tolerating more risk. The greater the
risk, the larger the potential reward r loss. In addition, we've added
historical 20-year average annual returns. The returns assume the reinvestment
of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
Flexible Funds seek a high total return by investing in a mixture of stocks,
bonds and cash instruments.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Prudential Allocation Fund:
Balanced Portfolio
The Balanced Portfolio invests in a diversified portfolio of stocks, bonds
(including convertible stocks and bonds) and money market instruments. The
Portfolio generally holds bonds of larger, more mature companies, which may be
subject to less price volatility than those held by the Strategy Portfolio, and
the weighted average maturity of the Balanced Portfolio's holdings is usually
shorter than that of the Strategy Portfolio.
The Balanced Portfolio may invest in foreign securities, which may be subject
to currency and political risk, and up to 10% of its assets in bonds rated
below investment grade, commonly known as "junk bonds," which are subject to
greater credit risk. The Balanced Portfolio may also engage in various
strategies to reduce certain investment risks and to attempt to enhance return,
using derivatives such as options, forward currency exchange contracts and
futures contracts, the risks of which are described in the prospectus.
<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 1/31/96
Six One Five Since
Months Year Years Inception2
<S> <C> <C> <C> <C>
Class A 4.7% 20.1% 70.4% 88.0%
Class B 4.2 19.3 63.9 98.6
Class C 4.2 19.3 N/A 17.2
Lipper Flexible Port. Avg3 8.9 26.0 81.9 108.2
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 12/31/95
One Five Since
Year Years Inception2
<S> <C> <C> <C>
Class A 11.8% 10.4% 9.9%
Class B 11.7 10.5 8.4
Class C 15.7 N/A 10.3
</TABLE>
Past performance is not a guarantee of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper Analytical Services. The
cumulative total returns do not take into account sales charges. The average
annual returns do take into account applicable sales charges. The Fund charges
a maximum front-end sales load of 5% for Class A shares and a contingent
deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1% for six years for Class B
shares. Class C shares have a 1% CDSC for one year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase.
2Inception dates: 1/22/90 Class A; 9/15/87 Class B; 8/1/94 Class C.
3Lipper average returns are for 169 funds for six months 147 funds for one
year, 42 funds for five years and 15 funds since inception of Class B shares on
9/15/87.
Investment Allocation
Six-Month Comparison
Balanced Portfolio
(GRAPH)
Expressed as a percentage of total net assets as of 7/31/95 and 1/31/96.
*Includes convertible securities.
Strategy Session.
Over the past six months, our strategy was to favor a slightly higher than
normal weighting in stocks and bonds. We believed that stocks still had room to
rise, especially if the economy continued to expand at a healthy rate. We also
believed interest rates would continue to decline in 1996, although probably
not as much as in 1995. We decreased our cash holdings to 8% of net assets from
13% during the period and bought stocks with the difference.
Within our bond allocation, we eliminated our dollar-denominated emerging
market debt, to focus primarily on U.S. Treasury bonds. We believed there was
better value in the U.S. bond market than in less-developed countries. Among
stocks, we focused on technology, financial services and growth-oriented
companies. Our technology stocks started losing momentum in November when
earnings slowed, which resulted in negative returns.
<PAGE>
Balanced Portfolio
What Went Well.
Focus On Financials.
Financial services stocks profited from lower interest rates, which made the
cost of their raw material -- money -- cheaper. One of our best performers was
the Federal National Mortgage Association (Fannie Mae), which comprised 2.6% of
total net assets and gained more than 47% over the past six months. Fannie Mae
buys mortgages from lending institutions. It holds a majority of them as
investments and repackages the rest for sale to the public as mortgage-backed
securities. As interest rates fell in 1995, Fannie Mae was able to borrow at
lower rates to invest in higher paying mortgages, which increased their
revenues and earnings for the year.
Lengthening Duration.
Since July, we lengthened the duration of the bond portion of the portfolio.
The longer the duration, the more sensitive a bond's price is to interest rate
changes. This strategy helped our bond holdings perform well as long-term
interest rates declined during the last six months.
What Could Have Gone Better.
We were right to shift more assets into stocks (technology stocks in
particular), but we missed out on the early gains and then were hurt later when
declines hit the sector.
Right Place, Wrong Time.
Technology stocks had the highest returns through the first half of 1995 but
gained less than 1% since then, as of January 31, 1996. Over the past six
months, we gradually increased our technology stock holdings to 19% from 17% of
net assets. During the fourth quarter, some of our semiconductor stocks lost
all of their 1995 gains as concerns of a potential supply glut and lower prices
rattled investors. We're holding onto certain networking and computer software
stocks, which rebounded nicely in mid-January.
When investors became skittish about the future earnings growth of technology
companies, many sold them to buy lower priced utility and consumer growth
stocks, such as pharmaceutical, tobacco and restaurant companies. This helped
push consumer growth and utility stock prices higher. Unfortunately, our
performance was hindered because we did not hold as many assets in these stocks
as the average flexible fund.
Looking Ahead.
We anticipate stable interest rates and continued economic growth in 1996. We
believe long-term interest rates will stabilize around 6.5% and short-term
rates will remain steady. Corporate earnings should continue to grow but at a
slower rate than in 1995. We see the best growth potential among the financial
services sector, certain technology industries, as well as cyclical companies
(such as retailers, airlines, etc.).
Five Largest Issuers.
23.3% U.S. Government
Bonds and Notes
2.6% Cisco Systems
Computer Software Services
2.6% Federal National
Mortgage Association
Financial Services
1.8% SunAmerica
Insurance
1.6% Bay Networks
Computer Software
Services
Expressed as a percentage of total net assets as of 1/31/96.
- -------------------------------------------------------------------------------
1
<PAGE>
President's Letter March 5, 1996
(PHOTO)
Dear Shareholder:
For many investors, 1995 was a profitable year -- most stock and bond funds
enjoyed healthy returns from the U.S. markets. While climbing returns can tempt
even the most skittish investors to start buying again, it is important to
remember that the stock and bond markets go down just as they go up. At times
like these, remember the importance of working with your Financial Advisor or
Registered Representative to help you find investments that are consistent with
your risk tolerance and time horizon. Your Financial Advisor or Registered
Representative can help you maintain realistic expectations about both the
potential performance and risks associated with your investments.
Shareholder Legislative Action Program.
From time to time we've been informing you about significant legislation before
Congress, such as the American Dream Savings Account, that may potentially
impact mutual fund investors. We want to make it easier for you to share your
views with your Congressional member. So, beginning in 1996, whenever Congress
is considering legislation that would affect you, we'll send you postage-paid
message cards that you simply drop in the mail if you want to let your senator
or representative know how you want him or her to vote.
Fund Profiles.
Over the past year, we've worked to make your shareholder reports more
interesting, informative and easy to read. This year, we'll be considering
"fund profiles." Some mutual fund companies now offer one to shareholders
along with a full prospectus. The purpose of a fund profile is to provide a
very brief, reader-friendly summary of a fund's objective, investments, risks
and expenses. Would you like to see fund profiles from us? Please call your
Financial Advisor or Registered Representative to share your views.
As always, thank you for your confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
- -------------------------------------------------------------------------------
4
<PAGE>
Portfolio of Investments as of PRUDENTIAL ALLOCATION FUND
January 31, 1996 (Unaudited) BALANCED PORTFOLIO
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--91.2%
COMMON STOCKS--53.3%
- ------------------------------------------------------------
Aerospace/Defense--0.6%
55,800 Boeing Co. $ 4,331,475
- ------------------------------------------------------------
Automotive--0.7%
130,000 Varity Corp.* 4,810,000
- ------------------------------------------------------------
Chemicals--2.8%
390,600 Agrium Inc. (Canada) 5,346,320
98,000 Dow Chemical Co. 7,301,000
175,000 Union Carbide Corp. 7,371,875
-------------
20,019,195
- ------------------------------------------------------------
Computer & Related Equipment--11.5%
158,550 Advanta Corp. 6,560,006
67,100 Advanta Corp. (ADS) 2,818,200
267,000 Bay Networks* 11,347,500
228,000 Cisco Systems, Inc.* 18,981,000
82,300 Compaq Computer Corp.* 3,878,387
186,000 COMS Corp. 3,487,500
90,000 Comverse Technology, Inc.* 1,743,750
166,100 EMC Corp.* 3,176,662
150,000 Intel Corp. 8,285,156
79,100 Motorola, Inc. 4,251,625
214,900 Network Express, Inc.* 832,737
73,900 Quad Systems Corp.* 572,725
75,900 Ross Technology Inc.* 986,700
236,000 Sun Microsystems Inc.* 10,856,000
314,000 Western Digital Corp.* 5,809,000
-------------
83,586,948
- ------------------------------------------------------------
Containers & Packaging--0.3%
148,800 Stone Container Corp. 2,176,200
Drugs & Health Care--5.4%
134,500 AMGEN Inc.* $ 8,086,813
84,500 Bard (C.R.), Inc. 2,957,500
93,000 Columbia/HCA Healthcare Corp. 5,173,125
67,400 Forest Laboratories, Inc.* 3,639,600
95,000 Johnson & Johnson 9,120,000
111,400 Physician Corp. of America* 2,005,200
76,850 St. Jude Medical, Inc.* 3,391,006
186,000 United States Surgical Corp. 4,836,000
-------------
39,209,244
- ------------------------------------------------------------
Electrical Equipment--0.6%
149,800 UCAR International Inc.* 4,662,525
- ------------------------------------------------------------
Electronics--4.1%
127,800 Applied Materials, Inc.* 4,728,600
91,100 KLA Instruments Corp.* 2,687,450
178,500 Tencor Instruments* 4,116,656
120,000 Texas Instruments Inc. 5,580,000
230,200 Ultratech Stepper Inc. 6,762,125
177,000 Uniphase Corp.* 6,195,000
-------------
30,069,831
- ------------------------------------------------------------
Financial Services--8.3%
44,400 Ahmanson (H.F.) & Co. 1,065,600
35,300 Citicorp 7,148,250
115,800 Dean Witter, Discover & Co. 6,267,675
543,200 Federal National Mortgage Association 18,740,400
297,200 Money Store, Inc. 5,795,400
117,300 Republic New York Corp. 6,832,725
186,000 Salomon Inc. 7,091,250
93,600 Student Loan Marketing Association 6,891,300
-------------
59,832,600
- ------------------------------------------------------------
Household Products--0.2%
15,500 Colgate-Palmolive Co. 1,147,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of PRUDENTIAL ALLOCATION FUND
January 31, 1996 (Unaudited) BALANCED PORTFOLIO
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Insurance--6.0%
166,200 Allstate Corp. $ 7,375,125
62,800 Amerin Corp.* 1,624,950
253,600 Equitable Companies, Inc. 6,244,900
83,700 Equitable of Iowa Cos. 3,096,900
116,600 Primark Corp.* 3,891,525
271,100 SunAmerica, Inc. 13,351,675
117,000 Travelers Group Inc. 7,692,750
-------------
43,277,825
- ------------------------------------------------------------
Oil & Gas--1.1%
83,000 Atlantic Richfield Co. 2,085,375
137,600 Mesa Inc.* 481,600
337,300 Noble Drilling Corp.* 3,309,756
146,300 Oryx Energy Co.* 1,920,188
-------------
7,796,919
- ------------------------------------------------------------
Paper & Forest Products--2.0%
100,000 Georgia-Pacific Corp. 7,337,500
180,000 International Paper Co. 7,357,500
-------------
14,695,000
- ------------------------------------------------------------
Petroleum Services--2.0%
335,500 BJ Services Co. 8,974,625
225,000 Smith International, Inc.* 5,287,500
-------------
14,262,125
- ------------------------------------------------------------
Realty Investment Trust--0.2%
85,700 Manufacturers Home Communities, Inc. 1,564,025
- ------------------------------------------------------------
Retail--0.8%
122,000 Caldor Corp.* 396,500
186,000 Dillard Department Stores, Inc. 5,394,000
-------------
5,790,500
- ------------------------------------------------------------
Software--1.9%
35,900 Baan Co. N.V.* (Netherlands) 1,557,163
90,500 Microsoft Corp.* 8,371,250
26,400 PIXAR Inc.* 528,000
263,700 Softkey International Inc.* $ 3,658,838
-------------
14,115,251
- ------------------------------------------------------------
Steel--0.5%
102,300 AK Steel Holding Corp. 3,542,138
- ------------------------------------------------------------
Steel & Metals--1.8%
73,000 Alumax, Inc.* 2,299,500
130,000 Aluminum Co. of America 7,215,000
272,000 National Steel Corp.* 3,740,000
-------------
13,254,500
- ------------------------------------------------------------
Telecommunications--0.8%
395,300 Nextel Communications Inc.* 5,435,375
- ------------------------------------------------------------
Tobacco--1.7%
65,100 Philip Morris Co., Inc. 6,054,300
933,700 RJR Nabisco Holdings Corp. 6,185,763
-------------
12,240,063
-------------
Total common stocks (cost
$341,094,408) 385,818,739
-------------
PREFERRED STOCKS--0.3%
- ------------------------------------------------------------
Insurance--0.3%
39,400 American General Delaware
Conv. Pfd. Stock
(cost $1,970,930) 2,196,550
-------------
<CAPTION>
Principal
Moody's Amount
Rating (000)
- ------------ --------
<C> <C> <S> <C>
DEBT OBLIGATIONS--37.6%
CORPORATE BONDS--14.3%
- ------------------------------------------------------------
Computer & Related Equipment--3.0%
Ba1 $ 4,975 Digital Equipment Corp.,
7.125%, 10/15/02 5,039,824
Ba3 4,356 E M C Corp.,
4.25%, 1/1/01 4,881,943
</TABLE>
- --------------------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as of PRUDENTIAL ALLOCATION FUND
January 31, 1996 (Unaudited) BALANCED PORTFOLIO
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount Description Value (Note 1)
Rating (000) (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Computer & Related Equipment (cont'd.)
A1 $ 9,835 Motorola Inc.,
Zero coupon, 9/27/13 $ 7,351,662
B1 1,946 Seagate Technology Inc.,
5.00%, 11/1/03 4,429,583
------------
21,703,012
- ------------------------------------------------------------
Conglomerate--0.8%
14,000 Valhi, Inc.,
Zero coupon, 10/20/07 5,551,000
- ------------------------------------------------------------
Containers & Packaging--0.4%
B2 2,205 Stone Container Corp.,
8.875%, 7/15/00 3,194,494
- ------------------------------------------------------------
Drugs & Health Care--1.6%
B3 7,305 Beverly Enterprises, Inc.,
5.50%, 8/1/18 7,314,131
NR 5,555 Roche Holdings Inc.,
(Switzerland)
Zero coupon, 9/23/08 4,187,081
------------
11,501,212
- ------------------------------------------------------------
Electronics--1.0%
B2 5,500 Integrated Device
Technology Inc.,
5.50%, 6/1/02 4,555,595
Ba1 2,500 Westinghouse Electric
Corp.,
6.875%, 9/1/03 2,436,475
------------
6,992,070
- ------------------------------------------------------------
Financial Services--2.8%
Associates Corp. of North
America,
Aa3 750 6.875%, 1/15/97 759,690
Aa3 200 8.375%, 1/15/98 211,218
NR 3,160 Banco Nacional De Mexico,
(Mexico)
7.00%, 12/15/99 2,776,850
A2 1,000 First Union Corp.,
Sub. Note,
9.45%, 6/15/99 1,115,860
A1 $ 5,000 Ford Motor Credit Co.,
7.75%, 3/15/05 $ 5,499,600
A2 10,000 Sears Roebuck Acceptance
Corp.,
6.75%, 9/15/05 10,355,600
------------
20,718,818
- ------------------------------------------------------------
Food & Beverage--0.1%
A3 500 Coca Cola Enterprises,
Inc.,
6.50%, 11/15/97 509,535
- ------------------------------------------------------------
Foreign Industrial--0.2%
NR 2,000 Nippon Denro Ispat, Ltd.,
(India)
3.00%, 4/1/01 1,165,000
- ------------------------------------------------------------
Insurance--0.5%
Baa3 7,135 USF&G Corp.,
Zero coupon, 3/3/09 3,995,600
- ------------------------------------------------------------
Oil & Gas--1.2%
Ba2 1,000 Arkla, Inc., (MTN),
9.30%, 1/15/98 1,054,810
Baa3 5,434 Noble Affiliates Inc.,
4.25%, 11/1/03 5,474,755
B2 2,420 Oryx Energy Co.,
7.50%, 5/15/14 2,202,200
------------
8,731,765
- ------------------------------------------------------------
Retail--0.5%
Baa3 7,000 K Mart Corp.,
8.125%, 12/1/06 4,200,000
- ------------------------------------------------------------
Tobacco--0.7%
Baa 5,000 RJR Nabisco, Inc.,
7.625%, 9/15/03 4,967,100
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Portfolio of Investments as of PRUDENTIAL ALLOCATION FUND
January 31, 1996 (Unaudited) BALANCED PORTFOLIO
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount Description Value (Note 1)
Rating (000) (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Tourism/Resorts--1.5%
Baa1 $ 3,260 Carnival Cruise Lines,
Inc.,
4.50%, 7/1/97 $ 5,116,766
Baa3 5,000 Royal Caribbean Cruises
Ltd.,
8.25%, 4/1/05 5,472,850
------------
10,589,616
------------
Total corporate bonds
(cost $101,229,909) 103,819,222
U. S. GOVERNMENT SECURITIES--23.3%
30,000 United States Treasury
Bonds,
7.625%, 2/15/25 36,318,600
United States Treasury
Notes,
40,000 5.625%, 10/31/97 40,450,000
30,100 7.50%, 2/15/05 34,083,434
25,000 6.50%, 5/15/05 26,578,000
30,000 6.125%, 7/31/00 31,040,700
------------
Total U. S. Government
securities
(cost $159,750,260) 168,470,734
------------
Total debt obligations
(cost $260,980,169) 272,289,956
------------
Total long-term
investments (cost
$604,045,507) 660,305,245
------------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--3.3%
CORPORATE NOTES--0.1%
- ------------------------------------------------------------
Ba1 400 Westinghouse Credit Corp.,
(MTN)
8.75%, 6/3/96 402,204
Ba1 450 Westinghouse Electric
Corp.,
8.70%, 6/20/96 452,844
------------
Total corporate notes
(cost $887,261) 855,048
------------
REPURCHASE AGREEMENT--3.2%
- ------------------------------------------------------------
$ 23,255 Joint Repurchase Agreement
Account,
5.91%, 2/1/96, (Note 5)
(cost $23,255,000) $ 23,255,000
------------
Total short-term
investments (cost
$24,142,261) 24,110,048
- ------------------------------------------------------------
Total Investments--94.5%
(cost $628,187,768; Note
4) 684,415,293
Other assets in excess of
liabilities--5.5% 39,468,638
------------
Net Assets--100% $723,883,931
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
ADS--American Depository Shares.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
8 See Notes to Financial Statements.
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL ALLOCATION FUND
(Unaudited) BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets January 31, 1996
Investments, at value (cost $628,187,768)................................................................. $684,415,293
Cash...................................................................................................... 61,361
Receivable for investments sold........................................................................... 63,117,162
Dividends and interest receivable......................................................................... 4,967,376
Receivable for Fund shares sold........................................................................... 957,547
Deferred expenses......................................................................................... 16,440
----------------
Total assets........................................................................................... 753,535,179
----------------
Liabilities
Payable for investments purchased......................................................................... 26,920,703
Payable for Fund shares reacquired........................................................................ 1,812,805
Due to Distributor........................................................................................ 428,077
Due to Manager............................................................................................ 388,315
Accrued expenses.......................................................................................... 101,348
----------------
Total liabilities...................................................................................... 29,651,248
----------------
Net Assets................................................................................................ $723,883,931
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 606,245
Paid-in capital in excess of par....................................................................... 651,914,125
----------------
652,520,370
Undistributed net investment income.................................................................... 3,572,298
Accumulated net realized gain on investments........................................................... 11,563,738
Net unrealized appreciation on investments............................................................. 56,227,525
----------------
Net Assets, January 31, 1996.............................................................................. $723,883,931
----------------
----------------
Class A:
Net asset value and redemption price per share
($273,186,569 3 22,823,394 shares of beneficial interest issued and outstanding).................... $11.97
Maximum sales charge (5% of offering price)............................................................ .63
----------------
Maximum offering price to public....................................................................... $12.60
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($448,373,337 3 37,606,163 shares of beneficial interest issued and outstanding).................... $11.92
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($2,324,025 3 194,929 shares of beneficial interest issued and outstanding)......................... $11.92
----------------
----------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL ALLOCATION FUND
BALANCED PORTFOLIO
Statement of Operations
(Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income January 31, 1996
<S> <C>
Income
Interest $ 9,252,147
Dividends (net of foreign withholding taxes
of $24,392)............................. 3,163,316
----------------
Total income............................ 12,415,463
----------------
Expenses
Distribution fee--Class A.................. 277,575
Distribution fee--Class B.................. 2,157,861
Distribution fee--Class C.................. 9,395
Management fee............................. 2,130,412
Transfer agent's fees and expenses......... 680,000
Custodian's fees and expenses.............. 78,950
Reports to shareholders.................... 76,250
Registration fees.......................... 54,700
Legal fees................................. 16,500
Trustees' fees and expenses................ 12,350
Insurance.................................. 9,900
Audit fee and expenses..................... 8,250
Miscellaneous.............................. 5,023
----------------
Total expenses.......................... 5,517,166
----------------
Net investment income......................... 6,898,297
----------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions.................... 21,189,589
Foreign currency transactions.............. (102,581)
----------------
21,087,008
Net change in unrealized appreciation on
investments................................ 17,401,748
----------------
Net gain on investments....................... 38,488,756
----------------
Net Increase in Net Assets
Resulting from Operations..................... $ 45,387,053
----------------
----------------
</TABLE>
PRUDENTIAL ALLOCATION FUND
BALANCED PORTFOLIO
Statement of Changes in Net Assets
(Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended
Increase Ended July 31,
in Net Assets January 31, 1996 1995
----------------- ------------
<S> <C> <C>
Operations
Net investment income......... $ 6,898,297 $ 11,616,551
Net realized gain on
investments and foreign
currency transactions...... 21,087,008 24,855,840
Net change in unrealized
appreciation of
investments................ 17,401,748 21,889,387
----------------- ------------
Net increase in net assets
resulting from
operations................. 45,387,053 58,361,778
----------------- ------------
Net equalization credits
(debits)...................... 440,006 (108,882)
----------------- ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A.................... (2,324,509) (2,234,935)
Class B.................... (3,239,256) (9,204,130)
Class C.................... (14,245) (21,646)
----------------- ------------
(5,578,010) (11,460,711)
----------------- ------------
Distributions from net
realized gains on
investment transactions
Class A.................... (10,904,493) (701,041)
Class B.................... (17,821,478) (7,720,336)
Class C.................... (80,545) (13,746)
----------------- ------------
(28,806,516) (8,435,123)
----------------- ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
subscribed (Note 8)........ 291,809,437 177,082,017
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions.......... 31,397,458 18,598,887
Cost of shares reacquired..... (125,930,547) (201,993,090)
----------------- ------------
Net increase (decrease) in net
assets from Fund shares
transactions............... 197,276,348 (6,312,186)
----------------- ------------
Total increase................... 208,718,881 32,044,876
Net Assets
Beginning of period.............. 515,165,050 483,120,174
----------------- ------------
End of period.................... $ 723,883,931 $515,165,050
----------------- ------------
----------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
10 See Notes to Financial Statements.
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
Prudential Allocation Fund, (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 Balanced Portfolio and the
Strategy Portfolio. The investment objective of the Balanced 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 Balanced Portfolio through varying the
proportions of investments in debt and equity securities, the quality and
maturity of debt securities purchased and the price volatility and the type of
issuer of equity securities purchased. The ability of issuers of debt securities
held by the Fund to meet their obligations may be affected by economic
developments in a specific country, industry or region.
- --------------------------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of generally accepted accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuation: Any security for which the primary market is on an
exchange (including NASDAQ National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day. Corporate bonds (other than convertible debt securities) and U.S.
Government and agency securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices provided by principal
market makers. Forward currency exchange contracts are valued at the current
cost of offsetting the contract on the day of valuation. Options are valued at
the mean between the most recently quoted bid and asked prices. Futures and
options thereon are valued at their last sales price as of the close of the
commodities exchange or board of trade.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange.
(ii) purchases and sales of investment securities, income and expenses-- at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of long-term securities held at the end of the fiscal period. Similarly,
the Fund does not isolate the effect of changes in foreign exchange rates from
the fluctuations arising from changes in the market prices of long-term
portfolio securities sold during the fiscal period. Accordingly, realized
foreign currency gains (losses) are included in the reported net realized gains
on investment transactions.
Net realized gains on foreign currency transactions represent net foreign
exchange gains from the holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, and
the difference between the amounts of dividends, interest
- --------------------------------------------------------------------------------
16
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL ALLOCATION FUND
- -------------------------------------------------------------------------------
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 Net 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 and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
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. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
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.
- --------------------------------------------------------------------------------
17
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
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 currency transactions.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with AICPA 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, 1996, the Balanced Portfolio and the Strategy
Portfolio decreased undistributed net investment income and increased
accumulated net realized gain on investments by $102,600 and $83,200,
respectively. 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 had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI'') is
distributor of the Class B and Class C shares of the Fund. The Fund compensated
PMFD and PSI 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. Effective January 2, 1996, PSI
became the distributor of the Class A shares of the Fund and is serving the Fund
under the same terms and conditions as under the arrangement with PMFD.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and PMFD for
the period August 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD has advised the Fund that it has received approximately $164,200
($105,500--Balanced Portfolio and $58,700--Strategy Portfolio) in front-end
sales charges resulting from sales of Class A shares during the six months ended
January 31, 1996. From these fees, PMFD paid such sales charges to dealers which
in turn paid commissions to salespersons.
PSI advised the Fund that for the six months ended January 31, 1996 it received
approximately $531,100 ($344,000--Balanced Portfolio and $187,100--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 Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the six months ended January
31, 1996, the Fund incurred fees of approximately $1,074,900 ($668,000--Balanced
Portfolio and $406,900--Strategy Portfolio) for the services of PMFS. As of
January 31, 1996, approximately $172,600 ($107,500--Balanced Portfolio and
$65,100--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.
- --------------------------------------------------------------------------------
18
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
For the six months ended January 31, 1996, PSI received approximately $65,400
($37,000--Balanced Portfolio and $28,400--Strategy Portfolio) in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended January 31, 1996, were as follows:
<TABLE>
<CAPTION>
Portfolio Purchases Sales
- ---------------------------------- ------------- -------------
<S> <C> <C>
Balanced Portfolio................ $ 500,265,757 $ 326,036,854
Strategy Portfolio................ $ 145,702,455 $ 169,267,624
</TABLE>
The cost basis of investments for federal income tax purposes as of January 31,
1996 was $628,187,768 and $327,970,092 for the Balanced Portfolio and the
Strategy Portfolio, respectively, and net and gross unrealized appreciation of
investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Balanced Strategy
Portfolio Portfolio
----------- -----------
<S> <C> <C>
Gross unrealized appreciation....... $84,822,694 $45,372,936
Gross unrealized depreciation....... 28,595,169 6,048,707
----------- -----------
Net unrealized appreciation......... $56,227,525 $39,324,229
----------- -----------
----------- -----------
</TABLE>
At January 31, 1996, the Strategy Portfolio bought 15 financial futures
contracts, on the S&P 500 Index expiring March 1996. The unrealized appreciation
on such contracts as of January 31, 1996 was as follows:
<TABLE>
<CAPTION>
Value on
Value at January 31, Unrealized
Portfolio Disposition 1996 Appreciation
- ---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Strategy Portfolio.... $ 9,270,500 $ 9,569,250 $ 298,750
</TABLE>
- --------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Government or federal agency obligations. As of January 31, 1996, the
Fund had a 5.7% (Balanced Portfolio--2.0% and Strategy Portfolio--3.7%)
undivided interest in the repurchase agreements in the joint account. The
undivided interest for the Fund represented $65,871,000 (Balanced
Portfolio--$23,255,000 and Strategy Portfolio--$42,616,000) 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., 5.90%, dated 1/31/96, in the principal amount of
$85,000,000, repurchase price $85,013,931, due 2/1/96. The value of the
collateral including accrued interest is $86,750,540.
CS First Boston Corp., 5.94%, dated 1/31/96, in the principal amount of
$383,000,000, repurchase price $383,063,195, due 2/1/96. The value of the
collateral including accrued interest is $390,660,453.
Goldman, Sachs Co., 5.90%, dated 1/31/96, in the principal amount of
$383,000,000, repurchase price $383,062,769, due 2/1/96. The value of the
collateral including accrued interest is $390,660,439.
Smith Barney Inc., 5.87%, dated 1/31/96, in the principal amount of
$316,512,000, repurchase price $316,563,620, due 2/1/96. The value of the
collateral including accrued interest is $322,842,680.
- --------------------------------------------------------------------------------
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. A special exchange privilege is also
available for shareholders who qualified to purchase Class A shares at net asset
value.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
- --------------------------------------------------------------------------------
19
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
Transactions in shares of beneficial interest for the six months ended January
31, 1996, and the fiscal year ended July 31, 1995 were as follows:
<TABLE>
<CAPTION>
Balanced Portfolio: Strategy Portfolio:
Class A Class A
------------------------------- -------------------------------
Six Months Ended January 31, 1996 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares issued............................................ 4,581,745 $ 55,324,002 727,875 $ 9,070,996
Shares issued in connection with acquisition of
Prudential IncomeVertible Fund (Note 8)................ 12,372,804 132,422,961 -- --
Shares issued in reinvestment of dividends and
distributions.......................................... 976,496 11,697,514 557,409 6,863,694
Shares reacquired........................................ (6,432,246) (78,206,041) (1,048,690) (13,144,869)
----------- ------------- ----------- -------------
Net increase in shares outstanding before conversion..... 11,498,799 121,238,436 236,594 2,789,821
Shares issued upon conversion from Class B............... 1,373,526 16,909,673 747,858 9,609,100
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 12,872,325 $ 138,148,109 984,452 $ 12,398,921
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<CAPTION>
Year Ended July 31, 1995
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued............................................ 3,862,947 $ 44,308,109 1,390,817 $ 15,562,421
Shares issued in reinvestment of dividends and
distributions.......................................... 251,790 2,763,092 226,669 2,532,533
Shares reacquired........................................ (3,252,889) (37,646,830) (1,480,078) (17,030,049)
----------- ------------- ----------- -------------
Net increase in shares outstanding before conversion..... 861,848 9,424,371 137,408 1,064,905
Shares issued upon conversion from Class B............... 5,717,102 62,038,822 4,041,405 45,163,786
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 6,578,950 $ 71,463,193 4,178,813 $ 46,228,691
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<CAPTION>
Class B Class B
------------------------------- -------------------------------
Six Months Ended January 31, 1996 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares issued............................................ 2,454,206 $ 29,357,066 950,208 $ 11,865,846
Shares issued in connection with acquisition of
Prudential IncomeVertible Fund (Note 8)................ 5,994,600 73,335,169 -- --
Shares issued in reinvestment of dividends and
distributions.......................................... 1,641,425 19,605,162 1,458,563 17,857,847
Shares reacquired........................................ (3,800,116) (45,568,668) (2,255,555) (28,162,920)
----------- ------------- ----------- -------------
Net increase in shares outstanding before conversion..... 6,290,115 76,728,729 153,216 1,560,773
Shares reacquired upon conversion into Class A........... (1,379,228) (16,909,673) (752,280) (9,609,100)
----------- ------------- ----------- -------------
Net increase (decrease) in shares outstanding............ 4,910,887 $ 59,819,056 (599,064) $ (8,048,327)
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<CAPTION>
Year Ended July 31, 1995
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued............................................ 5,899,203 $ 65,629,606 2,294,936 $ 26,157,592
Shares issued in reinvestment of dividends and
distributions.......................................... 1,480,760 15,800,410 1,357,022 14,767,213
Shares reacquired........................................ (9,125,344) (100,071,801) (7,554,633) (85,523,598)
----------- ------------- ----------- -------------
Net decrease in shares outstanding before conversion..... (1,745,381) (18,641,785) (3,902,675) (44,598,793)
Shares reacquired upon conversion into Class A........... (5,738,270) (62,038,822) (4,066,519) (45,163,786)
----------- ------------- ----------- -------------
Net decrease in shares outstanding....................... (7,483,651) $ (80,680,607) (7,969,194) $ (89,762,579)
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL ALLOCATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balanced Portfolio: Strategy Portfolio:
Class C Class C
------------------------------- -------------------------------
Six Months Ended January 31, 1996 Shares Amount Shares Amount
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares issued............................................ 113,994 $ 1,367,386 17,494 $ 218,911
Shares issued in connection with acquisition of
Prudential IncomeVertible Fund (Note 8)................ 252 2,853 -- --
Shares issued in reinvestment of dividends and
distributions.......................................... 7,918 94,782 2,128 26,103
Shares reacquired........................................ (181,060) (2,155,838) (7,664) (96,508)
----------- ------------- ----------- -------------
Net increase (decrease) in shares outstanding............ (58,896) $ (690,817) 11,958 $ 148,506
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
<CAPTION>
August 1, 1994* Through July 31, 1995
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued............................................ 442,652 $ 5,105,480 26,928 $ 310,801
Shares issued in reinvestment of dividends and
distributions.......................................... 3,269 35,385 850 9,297
Shares reacquired........................................ (192,096) (2,235,637) (4,509) (52,472)
----------- ------------- ----------- -------------
Net increase in shares outstanding....................... 253,825 $ 2,905,228 23,269 $ 267,626
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
Note 7. Dividends
On March 14, 1996, the Board of Trustees of the Fund declared a dividend from
undistributed net investment income of $.075 per share to Class A shareholders,
$.05 per share to Class B shareholders and Class C shareholders, and $.08 to
Class Z shareholders for the Balanced Portfolio and a dividend from
undistributed net investment income of $.08 per share to Class A shareholders,
and $.0575 per share to Class B shareholders and Class C shareholders for the
Strategy Portfolio. All dividends are payable on March 22, 1996 to shareholders
of record on March 19, 1996.
- --------------------------------------------------------------------------------
Note 8. Subsequent Events
Effective March 1, 1996, the Balanced Portfolio commenced offering Class Z
shares. Upon the commencement of such offering the Balanced Portfolio will be
divided into four classes of shares, designated Class A, Class B, Class C and
Class Z shares. Class Z shares are not subject to any sales or redemption charge
and are offered exclusively for sale to the Trustees of the Prudential
Securities 401(k) Plan, a defined contribution plan sponsored by Prudential
Securities.
- --------------------------------------------------------------------------------
Note 9. Acquisition of Prudential IncomeVertiblet Fund
On September 29, 1995, the Balanced Portfolio acquired all the net assets of
Prudential IncomeVertiblet Fund, Inc. (``IncomeVertible'') pursuant to a plan of
reorganization approved by IncomeVertible shareholders on September 6, 1995. The
acquisition was accomplished by a tax-free exchange of 12,372,804 Class A
shares, 5,994,600 Class B shares, and 252 Class C shares of the Balanced
Portfolio (valued at $205,760,983 in the aggregate) for 12,616,603 Class A
shares, 6,083,045 Class B shares, and 256 Class C shares, respectively, of
IncomeVertible outstanding on September 29, 1995. IncomeVertible's net assets at
that date ($205,760,983), including $22,146,090 of unrealized depreciation were
combined with those of the Balanced Portfolio. The aggregate net assets of the
Balanced Portfolio and IncomeVertible immediately before the acquisition were
$514,749,678 and $205,760,983 respectively.
- --------------------------------------------------------------------------------
21
<PAGE>
Financial Highlights PRUDENTIAL ALLOCATION FUND
(Unaudited) BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------------
Six Months
Ended Year Ended July 31,
January 31, -------------------------------------------------------
1996 1995 1994 1993 1992 1991
------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 12.04 $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23
------- -------- ------- ------- ------- ------
Income from investment operations
Net investment income................ .14 .34 .33 .43 .44 .44
Net realized and unrealized gain
(loss) on investment
transactions...................... .42 1.11 (.05) 1.16 .81 .73
------- -------- ------- ------- ------- ------
Total from investment
operations..................... .56 1.45 .28 1.59 1.25 1.17
------- -------- ------- ------- ------- ------
Less distributions
Dividends from net investment
income............................ (.14) (.33) (.37) (.37) (.44) (.44)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.49) (.20) (.54) (.47) (.54) (.23)
------- -------- ------- ------- ------- ------
Total distributions............... (.63) (.53) (.91) (.84) (.98) (.67)
------- -------- ------- ------- ------- ------
Net asset value, end of period....... $ 11.97 $ 12.04 $ 11.12 $ 11.75 $ 11.00 $10.73
------- -------- ------- ------- ------- ------
------- -------- ------- ------- ------- ------
TOTAL RETURN(a):..................... 4.65% 13.67% 2.39% 15.15% 12.29% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $273,187 $119,829 $37,512 $22,605 $10,944 $4,408
Average net assets (000)............. $220,853 $ 69,754 $29,875 $15,392 $ 7,103 $2,747
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.19%(b) 1.22% 1.23% 1.17% 1.29% 1.38%
Expenses, excluding distribution
fees........................... .94%(b) 0.97% 1.00% .97% 1.09% 1.18%
Net investment income............. 2.62%(b) 2.90% 2.84% 3.88% 3.97% 4.44%
For Class A, B and C shares:
Portfolio turnover rate........... 53% 201% 108% 83% 105% 137%
Average commission rate paid per
share $ 0.0573 N/A N/A N/A N/A N/A
- ---------------
</TABLE>
(a) 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.
(b) Annualized.
- --------------------------------------------------------------------------------
22 See Notes to Financial Statements.
<PAGE>
Financial Highlights PRUDENTIAL ALLOCATION FUND
(Unaudited) BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
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, ------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22
----------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income................ .11 .26 .24 .34 .35 .36
Net realized and unrealized gain
(loss) on investment
transactions...................... .40 1.10 (.05) 1.16 .82 .73
----------- -------- -------- -------- -------- --------
Total from investment
operations..................... .51 1.36 .19 1.50 1.17 1.09
----------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.10) (.25) (.28) (.29) (.36) (.37)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.49) (.20) (.54) (.47) (.54) (.23)
----------- -------- -------- -------- -------- --------
Total distributions............... (.59) (.45) (.82) (.76) (.90) (.60)
----------- -------- -------- -------- -------- --------
Net asset value, end of period....... $ 11.92 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
TOTAL RETURN(d):..................... 4.20% 12.79% 1.61% 14.27% 11.48% 11.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 448,373 $392,291 $445,609 $321,831 $225,995 $162,281
Average net assets (000)............. $ 429,227 $409,419 $392,133 $267,340 $189,358 $149,907
Ratios to average net assets:(c)
Expenses, including distribution
fees........................... 1.94%(b) 1.97% 2.00% 1.97% 2.09% 2.16%
Expenses, excluding distribution
fees........................... .94%(b) .97% 1.00% .97% 1.09% 1.16%
Net investment income............. 1.84%(b) 2.34% 2.08% 3.04% 3.25% 3.55%
<CAPTION>
Class C
-------------------------
August 1,
Six Months 1994(a)
Ended through
January 31, July 31,
1996 1995
----------- ---------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 12.00 $ 11.12
----------- ---------
Income from investment operations
Net investment income................ .11 .21
Net realized and unrealized gain
(loss) on investment
transactions...................... .40 1.12
----------- ---------
Total from investment
operations..................... .51 1.33
----------- ---------
Less distributions
Dividends from net investment
income............................ (.10) (.25)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.49) (.20)
----------- ---------
Total distributions............... (.59) (.45)
----------- ---------
Net asset value, end of period....... $ 11.92 $ 12.00
----------- ---------
----------- ---------
TOTAL RETURN(d):..................... 4.20% 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 2,324 $ 3,046
Average net assets (000)............. $ 1,869 $ 920
Ratios to average net assets:(c)
Expenses, including distribution
fees........................... 1.94%(b) 2.04%(b)
Expenses, excluding distribution
fees........................... .94%(b) 1.04%(b)
Net investment income............. 1.83%(b) 2.20%(b)
- ---------------
</TABLE>
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
(d) 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 Notes to Financial Statements. 23
<PAGE>
GETTING THE MOST FROM YOUR PRUDENTIAL MUTUAL FUND
CHANGE YOUR MIND.
You can exchange your shares in most Prudential Mutual Funds for shares in
most other Prudential Mutual Funds, without charges. This may be most helpful
if your investment needs change.
- ------------------------------------------------------------------------------
REINVEST DIVIDENDS FREE OF CHARGE.
Reinvest your dividends and/or capital gains distributions automatically --
without charge.
- ------------------------------------------------------------------------------
INVEST FOR RETIREMENT.
There is no minimum investment for an IRA. Plus, you defer taxes on your
investment earnings by investing in an IRA.
If you'd like, you can contribute up to $2,000 a year in an IRA. If you are
married, you and your spouse (if not working outside the home) can contribute
up to $2,250 a year. (Withdrawals are taxed as ordinary income and may be
subject to a 10% penalty prior to age 59 1/2.)
- ------------------------------------------------------------------------------
CHANGE YOUR JOB.
You can take your pension with you. Use a rollover IRA to manage your
company-sponsored retirement plan while retaining the special tax-deferred
advantages.
- ------------------------------------------------------------------------------
INVEST IN YOUR CHILDREN.
There's no fee to open a custodial account for a child's education or other
needs.
- ------------------------------------------------------------------------------
TAKE INCOME.
Would you like to receive monthly or quarterly checks in any amount from your
fund account? Just let us know. We'll take care of it. Of course, there are
minimum amounts. And shares redeemed may be subject to tax, and Class B and C
shares may be subject to contingent deferred sales charges. We'll gladly
answer your questions.
- ------------------------------------------------------------------------------
KEEP INFORMED.
We want to keep you up-to-date. Of course, you receive account activity
statements every quarter. But you also receive annual and semi-annual fund
reports, as well as other important updates on events that affect your
investments, including tax information.
THIS MATERIAL IS ONLY AUTHORIZED FOR DISTRIBUTION WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS. READ THE PROSPECTUS CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
<PAGE>
GETTING THE MOST FROM YOUR PRUDENTIAL MUTUAL FUND
HOW MANY TIMES HAVE YOU READ THESE LETTERS -- OR OTHER FINANCIAL MATERIALS --
AND STUMBLED ACROSS A WORD THAT YOU DON'T UNDERSTAND?
MANY SHAREHOLDERS HAVE RUN INTO THE SAME PROBLEM. WE'D LIKE TO HELP. SO
WE'LL USE THIS SPACE FROM TIME TO TIME TO EXPLAIN SOME OF THE WORDS YOU MIGHT
HAVE READ, BUT NOT UNDERSTOOD. AND IF YOU HAVE A FAVORITE WORD THAT NO ONE
CAN EXPLAIN TO YOUR SATISFACTION, PLEASE WRITE TO US.
BASIS POINT: One 1/100th of 1%. For example, one half of one percentage
point is 50 basis points.
CALL OPTION: A contract giving the holder a right to buy stocks or bonds at a
predetermined price (called the strike place) before a predetermined
expiration date. A buyer of a call option generally expects to benefit from
a rise in the price of the stock or bond.
CAPITAL GAIN/CAPITAL LOSS: The difference between the cost of a capital asset
(for example, a stock, bond or mutual fund share) and its selling price.
Under current law the federal income tax rate for individuals on a long-term
capital gain is 28%.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS): Pools of mortgage-backed
securities sliced in maturity ranges that bear differing interest rates.
These instruments are sensitive to changes in interest rates and homeowner
refinancing activity. They are subject to prepayment and maturity extension
risk.
DERIVATIVES: Securities that derive their value from another security. The
rate of return of these financial products rises and falls -- sometimes very
suddenly -- in response to changes in some specific interest rate, currency,
stock or other variable.
DISCOUNT RATE: The interest rate charged by the Federal Reserve on loans to
banks and other depositary institutions.
FEDERAL FUNDS RATE: The interest rate charged by one bank to another on
overnight loans.
FUTURES CONTRACT: An agreement to deliver A specific amount of a commodity
or financial instruments at a set price at a stipulated time in the future.
LEVERAGE: The use of borrowed assets to enhance return on equity. The
expectation is that the interest rate charged will be lower than the return
on the investment. While leverage can increase profits, it can also magnify
losses.
LIQUIDITY: The ease with which a financial instrument (or mutual fund) can be
bought or sold (converted into cash) in the financial markets.
OPTION: An agreement to buy or sell something, such as shares of stock, by a
certain time for a specified price. An option need not be exercised. In
fact, most expire unexercised.
PRICE/EARNINGS RATIO: The price of a share of stock divided by the earnings
per share for a 12-month period.
SPREAD: The difference between two values; most often used to describe the
difference between prices bid and asked for a security.
YANKEE BOND: A bond denominated in U.S. dollars but sold by a foreign company
or government in the U.S. market.
<PAGE>
GETTING THE MOST FROM YOUR PRUDENTIAL MUTUAL FUND
WHEN YOU INVEST THROUGH PRUDENTIAL MUTUAL FUNDS, YOU RECEIVE FINANCIAL ADVICE
THROUGH A PRUDENTIAL SECURITIES FINANCIAL ADVISOR OR PRUDENTIAL/PRUCO
SECURITIES REGISTERED REPRESENTATIVE. YOUR ADVISOR OR REPRESENTATIVE CAN
PROVIDE YOU WITH THE FOLLOWING SERVICES:
- ------------------------------------------------------------------------------
THERE'S NO REWARD WITHOUT RISK; BUT IS THIS RISK WORTH IT?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge -- sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction -- there
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
- ------------------------------------------------------------------------------
KEEPING UP WITH THE JONESES.
A financial advisor or registered representative can help you wade through the
numerous mutual funds available to find the ones that fit your own individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals, not at you personally. Your financial
advisor or registered representative will review your investment objectives
with you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance -- not just based
on the current investment fad.
- ------------------------------------------------------------------------------
BUY LOW, SELL HIGH.
Buying at the top of a market cycle and selling at the bottom are among the
most common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and remind you that you're investing for the long haul.
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
Internet Address:
http:\\www.prudential.com
TRUSTEES
Edward D. Beach
Donald D. Lennox
Douglas H. McCorkindale
Thomas T. Mooney
Richard A. Redeker
Louis A. Weil, III
OFFICERS
Richard A. Redeker, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102
DISTRIBUTOR
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT AUDITOR
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
LEGAL COUNSEL
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
THE VIEWS EXPRESSED IN THIS REPORT AND INFORMATION ABOUT THE FUND'S PORTFOLIO
HOLDINGS ARE FOR THE PERIOD COVERED BY THIS REPORT AND ARE SUBJECT TO CHANGE
THEREAFTER.
THE ACCOMPANYING FINANCIAL STATEMENTS AS OF JANUARY 31, 1996 WERE NOT AUDITED
AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THEM.
THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
Prudential Mutual Funds
BUILDING YOUR FUTURE (LOGO)
ON OUR STRENGTH BULK RATE
U.S. POSTAGE
PAID
Prudential Mutual Funds Permit 6807
One Seaport Plaza New York, NY
New York, NY 10292
Toll Free (800) 225-1852
74429R108 74429R405 MF134E2
74429R207 74429R504 Cat. #642013F
74429R306 74429R603
Prudential
Allocation
Fund
- -----------------------
Balanced Portfolio
Strategy Portfolio
SEMI
ANNUAL
REPORT
Prudential Mutual Funds January 31, 1996
BUILDING YOUR FUTURE (LOGO)
ON OUR STRENGTH
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
November 16, 1995
We are pleased to provide you with the Annual Report of The Prudential
Institutional Fund for the year ended September 30, 1995. The period was
generally characterized by bullish financial markets which, along with strong
cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $784.9 million at September 30, 1995 from $493.1 million at
September 30, 1994. The Fund has seven portfolios, each with a distinct
investment objective designed to allow shareholders the opportunity to select
various options to match different goals and risk tolerances.
Economy
Gross Domestic Product grew at a rate of 3.3% this fiscal year, compared to
4.4% the last fiscal year. The Fed ended its relentless pattern of rate
increases (six hikes during 1994) and cut short-term interest rates .25% in
July, 1995. The economy appears to be moving ahead at a reasonable pace, albeit
at one that's slower than 1994.
Leading indicators have been trending sideways --housing and auto sales
remain high but are off earlier peaks and employment remains relatively stable.
Restrained growth in both wages and consumer prices have kept inflation under
control. Although inflation isn't a problem, moderate economic growth led the
Fed to shelve any plans for further interest rate cuts.
Market Review
Returns for the U.S. stock and bond markets were lackluster toward the end of
1994. By the first quarter of 1995, the financial markets welcomed slower
economic growth and the S&P 500 Index returned nearly 10% --one of the best
quarters on record. Despite turmoil in the foreign exchange markets, bonds
rallied steadily throughout the first quarter. The surprisingly strong 1995
rally in stocks and bonds continued right through the third quarter. By the end
of September, 1995, the S&P 500 Index was up 29.7% for the fiscal year, while
the Lehman Government/Corporate Bond Index was up 14.3%.
Foreign stocks, as measured by the Morgan Stanley Europe, Australia and Far
East Index (EAFE), gained 5.8%. This relative performance is a reversal from
fiscal 1994 when the EAFE index outperformed both the S&P 500 Index and Lehman
index returns.
Fund Performance
As a result of the strength in the financial markets, each of the Fund's
portfolios achieved absolute positive returns for the year. For the most part,
comparable benchmarks proved difficult to surpass. Since each portfolio's
inception, returns have been very positive and compare satisfactorily versus the
benchmarks. This performance information along with comments from each
portfolio's adviser and portfolio holdings may be found on the following pages.
Summary
While we do not expect gains of this magnitude to be repeated in the near
future, we believe that investors who stick with a disciplined approach to
investing their retirement savings should be rewarded over the long term. We
look forward to continuing to meet the retirement and investment needs of our
shareholders.
Sincerely,
Mark R. Fetting
President
1
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to realize long-term total return consistent with moderate
portfolio risk.
INVESTMENT APPROACH: Under normal operating
parameters, the Adviser will use the following ranges, as a percentage of total
assets, for each type of security to be purchased by the Fund:
- 25%-50% will be invested in common and preferred stocks and other
equity-related securities.
- 30%-60% will be invested in investment-grade fixed income securities of
intermediate maturities.
- 0-45% will be invested in money market instruments.
ADVISER: Prudential Diversified Investment Strategies (PDI) is a business unit
of The Prudential Investment Corporation dedicated to equity index and balanced
fund investing for institutional clients. Established in 1975, PDI is among the
oldest quantitatively-oriented balanced managers in the country, currently
managing approximately $19 billion in equity, balanced and fixed income
accounts.
ADVISER'S COMMENTS: During 1994, the Federal Reserve raised short-term interest
rates six times. This relentless increase in rates had the intended effect of
slowing the economy; however, the stock market posted a small gain and the bond
market was down for the year. Fearing the Fed would repeat past mistakes by
stepping too hard on the monetary brakes, financial markets welcomed slower
economic growth in 1995. By the end of the first quarter, the return on the S&P
500 Index was one of the best on record, returning nearly 10%. Bonds also
rallied steadily throughout the quarter. By the end of June, 1995, the S&P 500
Index had returned more than 20%, while returns on bonds were the fourth best in
the last 70 years. Although growth stocks faltered during the third quarter, the
S&P 500 Index return reached almost 30% for the year. Despite a hiccup in July
and August, the yield on Treasury bonds fell to almost 6.5% --the lowest yield
since the opening weeks of 1994. The Lehman Aggregate Bond Index was up over 13%
for the year by the end of the third quarter. The Balanced Fund's allocation was
overweight in stocks (over 46% of assets) for the entire year. However, the
value stock holdings in the fund's portfolio underperformed the broader market
index (S&P 500) for the year. The underweighting in the technology and consumer
sector stocks were the primary reason for the fund's underperformance. Bonds
were slightly underweight for the year, while cash was slightly overweight.
Although we've taken some gains, we continue to favor stocks. With the economy
slowing, earnings momentum looks somewhat high. As long as earnings don't
surprise us on the downside, stocks can continue to outperform bonds if further
declines in interest rates accompany the economy's ``soft landing.''
<TABLE>
PERFORMANCE RESULTS:
<CAPTION>
Composite
Average Annual Returns Fund Index (1)
<S> <C> <C>
------------------------- ------------- ----------
One Year ended 9/30/95 +15.90% +20.42%
From Inception (11/5/92) +10.85% +10.86%
</TABLE>
Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. The Manager is currently limiting the
expenses of the Fund. Without this reduction of expenses, the total return would
have been lower.
(1) The Composite Index is a weighted average as follows: 45% S&P 500; 45%
Lehman Brothers Government/Corporate Index; 10% T-Bill return. For each of the
periods, the Fund, on average, has been invested 46% in stocks, 43% in bonds and
11% in money market instruments. The S&P 500 returned 29.74%, and 15.40%; the
Lehman Gov't/Corp Index returned 14.35%, and 7.79%, and T-Bills returned 5.80%
and 4.20% for each period, respectively.
27
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment
(CHART)
----- Balanced Fund . . . . S&P 500 - - - - Lehman Gov't./Corp. Index
Past performance is no guarantee of future results and an investor's
shares may be worth more or less than their original cost.
This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in The Prudential Institutional Fund:
Balanced Fund (the ``Fund'') with similar investments in the Lehman
Government/Corporate Bond Index (GCI) and the S&P 500 Index (S&P 500) by
portraying the initial account values at the commencement of operations
and subsequent account values at the end of each fiscal year (September
30) beginning in 1992. For purposes of the graph and, unless otherwise
indicated in the accompanying table, it has been assumed that all
recurring fees (including management fees) were deducted and all
dividends and distributions were reinvested.
The GCI is a weighted index comprised of public, fixed rate,
non-convertible domestic corporate debts that are rated at least
investment grade (BBB/Baa or higher) and public obligations of the U.S.
Treasury. The S&P 500 is a capital-weighted index, representing the
aggregate market value of the common equity of 500 stocks primarily
traded on the New York Stock Exchange. The GCI and the S&P 500 are
unmanaged indices and both include the reinvestment of all income, but
do not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The securities which comprise
the GCI and the S&P 500 may differ substantially from the securities in
the Fund's portfolio. The GCI and the S&P 500 are not the only indices
which may be used to characterize performance of balanced funds and
other indices may portray different comparative performance.
28
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--89.7%
Common Stocks--45.7%
Aerospace/Defense--0.5%
15,100 Martin Marietta Corp............... $ 296,338
2,100 Rockwell International Corp........ 99,225
-----------
395,563
-----------
Automobiles & Trucks--1.3%
4,700 Allied Signal Automotive, Inc...... 207,387
5,000 Danaher Corp....................... 163,750
General Motors Corp.
4,000 Class E............................ 182,000
10,000 Class H............................ 410,000
3,700 Modine Manufacturing Co............ 105,450
-----------
1,068,587
-----------
Banking--2.8%
7,400 Bank of Boston Corp................ 352,425
16,800 Bank of New York, Inc.............. 781,200
1,900 First Chicago Corp................. 130,387
2,700 First Interstate Bank Corp......... 272,025
23,600 Norwest Corp....................... 772,900
-----------
2,308,937
-----------
Building Materials & Components--0.3%
9,000 USG Corp.(a)....................... 252,000
-----------
Capital Goods--0.6%
Fisher Scientific International,
15,000 Inc.............................. 485,625
-----------
Chemicals--3.9%
7,000 Agrium, Inc........................ 256,845
2,000 Air Products & Chemicals, Inc...... 104,250
10,400 Cytec Industries, Inc.(a).......... 601,900
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
8,000 duPont (E.I.) de Nemours & Co...... $ 550,000
3,000 Eastman Chemical Co................ 192,000
9,000 Grace (W.R.) & Co.................. 600,750
Imperial Chemical Inds. (ADR)
8,000 (United Kingdom)................. 406,000
6,600 Olin Corp.......................... 453,750
-----------
3,165,495
-----------
Chemical-Specialty--1.0%
7,500 Hanna (M.A.) Co.................... 197,812
10,600 Mississippi Chemical Corp.......... 222,600
3,100 OM Group, Inc...................... 94,163
36,100 Uniroyal Chemical Corp.(a)......... 324,900
-----------
839,475
-----------
Commercial Services--0.6%
11,000 York International Corp............ 463,375
-----------
Computer Software & Services--0.5%
6,000 Automatic Data Processing, Inc..... 408,750
-----------
Construction--0.5%
32,000 Giant Cement Holding Inc.(a)....... 388,000
-----------
Consumer Goods--1.6%
13,000 Ethan Allen Interiors, Inc.(a)..... 279,500
13,000 Libbey, Inc........................ 310,375
16,000 Owens Corning Fiberglas Corp.(a)... 714,000
-----------
1,303,875
-----------
Drugs & Medical Supplies--1.8%
10,100 Baxter International Inc........... 415,362
8,000 Schering-Plough Corp............... 412,000
30,000 Whitman Corp....................... 618,750
-----------
1,446,112
-----------
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electrical Equipment--0.9%
14,000 Anixter International Inc.(a)...... $ 579,250
6,800 UCAR International Inc.(a)......... 185,300
-----------
764,550
-----------
Electronics--1.0%
6,000 Emerson Electric Co................ 429,000
7,200 Oak Industries, Inc.(a)............ 216,900
2,500 Sundstrand Corp.................... 161,875
-----------
807,775
-----------
Financial Services--1.6%
12,400 Dean Witter Discover & Co.......... 697,500
10,500 Equitable Companies, Inc........... 388,500
4,700 Finova Group, Inc.................. 209,150
-----------
1,295,150
-----------
Food & Beverage--0.1%
4,000 Sbarro, Inc........................ 92,000
-----------
Forest Products--0.4%
7,000 Pentair, Inc....................... 315,000
-----------
Freight Transportation--0.3%
9,000 Pittston Services Group............ 244,125
-----------
Furniture
1,900 INTERCO Inc.(a).................... 14,963
-----------
Gas Pipelines--1.9%
19,400 Cabot Oil & Gas Corp............... 264,325
12,900 Enron Corp......................... 280,575
15,700 Mesa, Inc.(a)...................... 74,575
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
11,000 Parker & Parsley Petroleum Co...... $ 220,000
6,700 Seagull Energy Corp.(a)............ 135,675
20,000 Total S.A. (ADR) (France).......... 602,500
-----------
1,577,650
-----------
Health Care--0.3%
10,000 Quorum Health Group(a)............. 226,250
-----------
Hospital Management--1.3%
10,400 Columbia Healthcare Corp........... 505,700
33,000 Tenet Healthcare Corp.(a).......... 573,375
-----------
1,079,075
-----------
Insurance--3.7%
7,300 Emphesys Financial Group, Inc...... 271,013
7,000 John Alden Financial Corp.......... 158,375
3,900 NAC Re Corp........................ 141,375
9,700 National Re Corp................... 343,137
16,000 Penncorp Financial Group, Inc...... 382,000
Reinsurance Group of America,
17,200 Inc.............................. 606,300
15,000 TIG Holdings, Inc.................. 403,125
6,000 Travelers, Inc..................... 318,750
28,900 Western National Corp.............. 397,375
-----------
3,021,450
-----------
Machinery--1.5%
Gardner Denver Machinery,
26,000 Inc.(a).......................... 442,000
10,000 IDEX Corp.......................... 357,500
17,100 United Dominion Inds............... 412,537
-----------
1,212,037
-----------
Manufacturing--0.2%
4,500 Parker-Hannifin Corp............... 171,000
-----------
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--2.2%
10,000 Comcast Corp....................... $ 198,750
14,900 Cox Communications, Inc.(a)........ 301,725
9,400 Gannett, Inc....................... 513,475
News Corp. Ltd. (ADR)
6,000 (Australia)...................... 119,250
10,000 Time Warner, Inc................... 397,500
9,437 Times Mirror Co.................... 271,314
-----------
1,802,014
-----------
Medical Technology--0.3%
8,200 Guidant Corp....................... 239,850
-----------
Mineral Resources--0.5%
23,500 INDRESCO, Inc.(a).................. 420,063
-----------
Miscellaneous Basic Industry--4.5%
21,100 ADT Ltd.(a)........................ 290,125
15,600 Belden, Inc........................ 409,500
6,900 Crane Co........................... 238,050
19,500 Ferro Corp......................... 485,062
7,000 FMC Corp.(a)....................... 532,000
9,000 Illinois Tool Works, Inc........... 529,875
17,960 Mark IV Industries, Inc............ 399,610
10,000 Tyco International Ltd............. 630,000
2,500 United Technologies Corp........... 220,938
-----------
3,735,160
-----------
Office Equipment & Supplies--0.6%
12,100 Honeywell, Inc..................... 518,788
-----------
Oil & Gas-Equipment & Services--0.8%
20,700 Frontier Corp...................... 551,138
5,400 Vintage Petroleum, Inc............. 113,400
-----------
664,538
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Petroleum--1.2%
30,000 Cross Timbers Oil Co............... $ 427,500
18,000 Occidental Petroleum Corp.......... 396,000
Santa Fe Energy Resources,
15,000 Inc.(a).......................... 142,500
-----------
966,000
-----------
Petroleum Services--0.5%
33,300 Oryx Energy Co..................... 432,900
-----------
Publishing--0.3%
17,000 American Publishing Co., Class A... 212,500
-----------
Railroads--1.5%
6,400 Burlington Northern Inc............ 464,000
8,900 Illinois Central Corp.............. 348,212
7,000 Union Pacific Corp................. 463,750
-----------
1,275,962
-----------
Restaurants--0.1%
4,300 Shoney's Inc.(a)................... 47,300
-----------
Retail--1.4%
50,000 Best Products, Inc.(a)............. 425,000
12,000 Dillard Department Stores, Inc..... 382,500
4,900 Eckerd Corp.(a).................... 196,000
4,100 Harcourt General, Inc.............. 171,687
-----------
1,175,187
-----------
Rubber--0.4%
9,000 Goodyear Tire & Rubber Co.......... 354,375
-----------
Steel--0.1%
3,000 Carpenter Technology Corp.......... 117,375
-----------
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Technology--0.8%
14,500 Coltec Inds., Inc.(a).............. $ 174,000
10,400 Litton Industries Inc.(a).......... 452,400
-----------
626,400
-----------
Telecommunications--1.5%
20,900 MCI Communications Corp............ 544,706
36,500 Tele Communications, Inc.(a)....... 706,275
-----------
1,250,981
-----------
Utility-Communications--0.4%
9,100 AirTouch Communications(a)......... 278,688
600 WorldCom Inc.(a)................... 19,275
-----------
297,963
-----------
Total common stocks
(cost $31,721,047)................. 37,484,175
-----------
Principal
Amount
(000) DEBT OBLIGATIONS--44.0%
- --------
Asset Backed Securities--0.5%
Standard Credit Card Master Trust
I,
Series 1995 Class - A1
$ 400 8.25%, 1/7/07 (cost $444,938)...... 438,872
-----------
Corporate Bonds--7.2%
African Development Bank,
400 7.70%, 7/15/02..................... 424,732
(Banking)
American General Finance Corp.,
400 7.25%, 5/15/05..................... 412,132
(Financial Services)
Comdisco Inc.,
300 6.50%, 6/15/00..................... 296,730
(Commercial Services)
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consolidated Edison Co., Inc.,
$ 300 6.625%, 2/1/02.................... $ 299,175
(Utilities)
Detroit Edison Co.,
350 6.34%, 3/15/00.................... 346,038
(Utilities)
Federal Express Corp.,
350 10.00%, 9/1/98.................... 381,836
(Shipping)
Ford Motor Credit Co.,
400 9.375%, 12/15/97.................. 424,116
(Financial Services)
General Electric Capital Corp.,
400 8.75%, 11/26/96................... 411,024
(Financial Services)
General Motors Acceptance Corp.,
400 9.625%, 5/15/00................... 447,896
(Financial Services)
Greyhound Financial Corp.,
100 8.50%, 5/1/98..................... 104,629
(Financial Services)
Hanson PLC.,
400 7.375%, 1/15/03................... 413,828
(Industrial) (United Kingdom)
International Lease Finance Corp.,
200 5.50%, 4/1/97..................... 197,634
(Financial Services)
Lehman Brothers, Inc.,
200 7.125%, 7/15/02................... 198,082
(Financial Services)
Norwest Corp.,
300 7.125%, 4/1/00.................... 307,899
(Banking)
Salomon, Inc.,
200 8.64%, 2/27/98.................... 207,340
(Financial Services)
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Corporate Bonds, cont'd.
Sears Roebuck & Co.,
$ 100 9.48%, 7/24/01.................... $ 113,359
(Retail)
Sears Roebuck Acceptance Corp.,
300 6.75%, 9/15/05.................... 297,726
(Financial Services)
Texas Utilities Co.,
300 6.375%, 8/1/97.................... 299,787
(Utilities)
Union Oil Co.,
300 7.75%, 4/20/05.................... 316,758
-----------
(Petroleum)
Total corporate bonds
(cost $5,852,940)................. 5,900,721
-----------
U. S. Government Securities--36.3%
United States Treasury Bonds,
1,600 10.75%, 8/15/05................... 2,120,256
6,300 11.25%, 2/15/15................... 9,473,625
United States Treasury Notes,
3,700 6.00%, 11/30/97................... 3,709,250
400 5.625%, 1/31/98................... 397,688
4,325 9.00%, 5/15/98.................... 4,644,661
5,500 6.375%, 1/15/99................... 5,565,285
2,000 7.50%, 10/31/99................... 2,105,940
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
United States Treasury Notes,
$ 150 7.75%, 11/30/99................... $ 159,421
1,100 6.375%, 8/15/02................... 1,116,324
500 7.25%, 8/15/04.................... 534,610
-----------
Total U. S. Government Securities
(cost $29,249,979).............. 29,827,060
-----------
Total debt obligations
(cost $35,547,857).............. 36,166,653
-----------
Total long-term investments
(cost $67,268,904).............. 73,650,828
-----------
SHORT-TERM INVESTMENT
Repurchase Agreement--8.9%
7,338 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)
(cost $7,338,000)............... 7,338,000
-----------
Total Investments--98.6%
(cost $74,606,904; Note 4)........ 80,988,828
Other assets in excess of
liabilities--1.4%................. 1,121,118
-----------
Net Assets--100%.................. $82,109,946
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
33
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
------------ ------------ ------------- ------------ ----------- ----------- -----------
Assets
Investments, at value
(a)...................... $222,374,363 $ 96,471,101 $137,331,985 $133,506,023 $80,988,828 $57,633,152 $57,471,203
Cash....................... -- -- 184 417 872 897 440
Foreign currency, at value
(cost $153,643).......... -- -- 153,891 -- -- -- --
Receivable for investments
sold..................... 1,199,509 5,941,403 -- 176,030 1,133,257 -- --
Interest and dividends
receivable............... 162,987 206,021 404,440 641,767 685,304 563,134 386,072
Receivable for Fund shares
sold..................... 789,547 361,069 323,593 191,349 207,730 58,336 227,193
Due from Manager........... -- 1,754 -- -- -- 4,635 --
Deferred expenses and other
assets................... 29,670 32,252 29,485 30,735 28,919 31,988 30,486
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total assets........... 224,556,076 103,013,600 138,243,578 134,546,321 83,044,910 58,292,142 58,115,394
------------ ------------ ------------- ------------ ----------- ----------- -----------
Liabilities
Payable for investments
purchased................ 2,555,583 872,222 987,689 1,013,369 667,995 5,934,375 --
Payable for Fund shares
reacquired............... 1,286,353 85,455 314,389 46,984 155,532 11,863 34,386
Accrued expenses........... 77,378 70,888 148,784 51,045 44,922 42,870 16,633
Due to broker-variation
margin................... -- 29,670 -- -- -- -- --
Management fee payable..... 107,403 -- 92,756 68,472 57,582 -- 3,953
Administration fee
payable.................. 23,965 10,799 14,738 14,564 8,933 5,667 6,345
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total liabilities...... 4,050,682 1,069,034 1,558,356 1,194,434 934,964 5,994,775 61,317
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Assets................. $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 13,604 $ 7,169 $ 8,964 $ 10,703 $ 6,576 $ 5,238 $ 58,054
Paid-in capital in excess
of par................... 169,441,843 80,650,936 121,007,773 116,928,121 71,932,999 52,130,203 57,996,023
------------ ------------ ------------- ------------ ----------- ----------- -----------
169,455,447 80,658,105 121,016,737 116,938,824 71,939,575 52,135,441 58,054,077
Undistributed net
investment income........ -- 1,562,991 1,582,613 2,883,961 1,706,435 -- --
Accumulated net realized
gain (loss) on
investments.............. (3,016,003) 4,001,988 (3,235,336 ) 1,414,649 2,082,012 (732,600) --
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 54,065,950 15,721,482 17,321,208 12,114,453 6,381,924 894,526 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets, September 30,
1995..................... $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Shares of beneficial
interest issued and
outstanding.............. 13,604,202 7,168,801 8,964,457 10,703,173 6,575,791 5,237,904 58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net asset value per
share.................... $ 16.21 $ 14.22 $ 15.25 $ 12.46 $ 12.49 $ 9.98 $ 1.00
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a) Identified cost........ $168,308,413 $ 80,942,844 $120,016,426 $121,391,570 $74,606,904 $56,738,626 $57,471,203
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................. $ 198,002 $ 637,099 $ 499,812 $ 3,847,389 $ 2,407,512 $ 3,187,231 $ 3,128,647
Dividends (a)............ 1,190,186 1,623,115 3,287,355 896,599 560,304 -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total income........... 1,388,188 2,260,214 3,787,167 4,743,988 2,967,816 3,187,231 3,128,647
------------ ------------ ------------- ------------ ----------- ----------- -----------
Expenses
Management fee........... 1,049,893 286,843 1,367,665 733,748 496,395 231,931 236,009
Administration fee....... 201,075 96,138 159,439 140,527 95,069 62,187 70,311
Custodian's fees and
expenses................. 88,000 124,000 280,000 74,000 72,000 65,000 73,000
Registration fees........ 63,000 35,000 32,000 60,000 23,000 25,000 30,000
Transfer agent's fees and
expenses............... 36,092 17,256 28,618 25,224 17,064 11,162 12,621
Reports to
shareholders............. 25,000 25,000 25,000 13,000 25,000 13,000 13,000
Amortization of
organization
expenses............... 13,385 13,385 13,385 13,213 13,385 13,049 13,213
Legal fees............... 11,000 11,000 15,000 11,000 11,000 11,000 11,000
Audit fee................ 12,000 11,000 15,000 12,000 11,000 11,000 9,000
Trustees' fees........... 8,572 8,572 8,572 8,572 8,572 8,572 8,572
Miscellaneous............ 6,056 4,525 5,856 5,244 4,762 4,256 4,382
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total expenses......... 1,514,073 632,719 1,950,535 1,096,528 777,247 456,157 481,108
Expense subsidy (Note
2)..................... (14,225) (202,456) (47,700) (48,317) (68,112) (131,453) (166,428)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net expenses............... 1,499,848 430,263 1,902,835 1,048,211 709,135 324,704 314,680
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net investment income
(loss)................... (111,660) 1,829,951 1,884,332 3,695,777 2,258,681 2,862,527 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss)
on:
Securities............... 820,651 1,869,439 (2,892,161) 1,585,229 2,197,085 92,951 --
Futures transactions..... -- 2,175,415 -- -- -- -- --
Foreign currency
transactions............. (5,798) -- (192,785) -- (1,009) -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
814,853 4,044,854 (3,084,946) 1,585,229 2,196,076 92,951 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 47,538,274 13,632,300 9,333,213 12,809,504 6,413,335 2,865,097 --
Financial futures
contracts................ -- 282,600 -- -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
47,538,274 13,914,900 9,333,213 12,809,504 6,413,335 2,865,097 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net gain on investments and
foreign currencies....... 48,353,127 17,959,754 6,248,267 14,394,733 8,609,411 2,958,048 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................. $ 48,241,467 $ 19,789,705 $8,132,599 $ 18,090,510 $10,868,092 $ 5,820,575 $ 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a)Net of foreign withholding taxes of $26,902, $11,248, $461,615, $3,187, $10,097, respectively.
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
MONEY
BALANCED INCOME MARKET
FUND FUND FUND
------------------------------- ------------------------------- -------------------------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
------------------------------- ------------------------------- -------------------------------
1995 1994 1995 1994 1995 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment
income............... $ 2,258,681 $ 1,261,344 $ 2,862,527 $ 1,982,080 $ 2,813,967 $ 1,276,052
Net realized gain
(loss) on investments
and foreign currency
transactions......... 2,196,076 163,359 92,951 (826,533) -- 1,550
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 6,413,335 (1,878,445) 2,865,097 (2,659,530) -- --
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease)
in net assets
resulting from
operations........... 10,868,092 (453,742) 5,820,575 (1,503,983) 2,813,967 1,277,602
------------- ------------- ------------- ------------- ------------- -------------
Net equalization
credits................ -- 721,188 -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (1,529,788) (604,065) (2,862,527) (1,982,080) (2,813,967) (1,277,602)
------------- ------------- ------------- ------------- ------------- -------------
Distributions to
shareholders from net
realized gains....... (269,963) (735,383) -- (137,236) -- --
------------- ------------- ------------- ------------- ------------- -------------
Fund share transactions
Net proceeds from
shares sold.......... 26,091,264 42,441,610 11,549,255 15,768,473 55,919,976 32,311,167
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 1,799,751 1,339,448 2,862,527 2,119,316 2,813,967 1,277,602
Cost of shares
redeemed............. (19,161,993) (6,059,058) (6,473,780) (7,878,160) (47,010,598) (17,493,001)
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net
assets from Fund
share transactions... 8,729,022 37,722,000 7,938,002 10,009,629 11,723,345 16,095,768
------------- ------------- ------------- ------------- ------------- -------------
Net increase............ 17,797,363 36,649,998 10,896,050 6,386,330 11,723,345 16,095,768
Net Assets
Beginning of year...... 64,312,583 27,662,585 41,401,317 35,014,987 46,330,732 30,234,964
------------- ------------- ------------- ------------- ------------- -------------
End of year............ $ 82,109,946 $64,312,583 $52,297,367 $41,401,317 $ 58,054,077 $46,330,732
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
46
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
BALANCED INCOME
FUND FUND
---------------------------------------------- ---------
November 5,
1992(a) Year Ended
Year Ended September 30, Through September 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.08 $ 11.80 $ 10.00 $ 9.38
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... .18 .31 .31 .59
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. 1.53 (.52) 1.54 .60
--------- ------------- ------------- ---------
Total from investment operations............. 1.71 (.21) 1.85 1.19
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.25) (.23) (.05) (.59)
Distributions from net realized gains......... (.05) (.28) -- --
--------- ------------- ------------- ---------
Total distributions........................... (.30) (.51) (.05) (.59)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 12.49 $ 11.08 $ 11.80 $ 9.98
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 15.90% (1.88)% 18.58% 13.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $82,110 $64,313 $27,663 $52,297
Average net assets (000)...................... $70,914 $44,048 $17,401 $46,386
Ratios to average net assets: (b)
Expenses..................................... 1.00% 1.00% 1.00%(c) .70%
Net investment income........................ 3.19% 2.86% 3.16%(c) 6.17%
Portfolio turnover rate....................... 65% 52% 74% 145%
<CAPTION>
INCOME
FUND
--------------------------------
March 1,
1993(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 10.33 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .52 .27
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. (.91) .33
------------- -------------
Total from investment operations............. (.39) .60
------------- -------------
Less distributions:
Dividends from net investment income.......... (.52) (.27)
Distributions from net realized gains......... (.04) --
------------- -------------
Total distributions........................... (.56) (.27)
------------- -------------
Net asset value, end of period................ $ 9.38 $ 10.33
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... (3.91)% 6.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $41,401 $35,015
Average net assets (000)...................... $37,802 $25,626
Ratios to average net assets: (b)
Expenses..................................... .70% .70%(c)
Net investment income........................ 5.24% 4.62%(c)
Portfolio turnover rate....................... 83% 93%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods
of less than a full year are not annualized. Total return includes the
effect of expense subsidies.
See Notes to Financial Statements.
49
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The Prudential Institutional Fund (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. (``PIFM'').
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer. Forward currency
51
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
exchange contracts shall be valued at the current cost of covering or offsetting
such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company'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 Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
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. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds 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 rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange
52
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal year. Similarly, the
Funds do 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 year. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of net unrealized appreciation/
depreciation on securities and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Equalization: During the fiscal year ended September 30, 1995, the Funds
(except for the Income and Money Market Funds) discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital 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. The following balances of undistributed net investment income at
September 30, 1994, resulting from equalization were transferred to paid-in
capital in excess of par for each of the respective Funds:
Growth Stock Fund $ 90,444
Stock Index Fund 398,227
International Stock Fund 881,462
Active Balanced Fund 788,116
Balanced Fund 899,912
Such reclassifications have no effect on net assets, results of operations,
or net asset value per share of the Funds.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the ``ex-dividend'' date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
53
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies.
For the year ended September 30, 1995, the application of this statement
affected undistributed net investment income (``UNI''), accumulated net realized
gain (loss) on investments (``G/L'') and paid-in capital in excess of par
(``PIC'') by the following amounts:
<TABLE>
<CAPTION>
UNI G/L PIC
--------- -------- ---------
<S> <C> <C> <C>
Growth Stock Fund $ 141,451 $ 5,798 $(147,249)
International Stock Fund (81,325) 81,325 --
Active Balanced Fund (107,185) 107,185 --
Balanced Fund (112,634) 112,634 --
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation (``PIC''), Jennison Associates Capital Corp. (``Jennison'') and
Mercator Asset Management, Inc. (``Mercator''), each a wholly-owned subsidiary
of Prudential. Each subadviser will furnish investment advisory services in
connection with the management of the various Funds. Jennison serves as
subadviser to the Growth Stock Fund and the Active Balanced Fund. PIC serves as
subadviser to the Balanced Fund, the Stock Index Fund, the Income Fund and the
Money Market Fund. Mercator serves as subadviser to the International Stock
Fund. PIFM will pay for the costs and expenses attributable to the subadvisory
agreements and the salaries and expenses of all personnel of the Company except
for fees and expenses of unaffiliated Trustees. The Funds will bear all other
costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
Fund Management Fee
- -------------------------- ---------------
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so long as the total expense ratios do not exceed
54
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
certain predetermined levels set forth in the Company's prospectus. For the year
ended September 30, 1995, PIFM subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- ------------------------- ------------- ------------------
<S> <C> <C>
Growth Stock Fund .01% $ .001
Stock Index Fund .28 .025
International Stock Fund .04 .002
Active Balanced Fund .05 .004
Balanced Fund .10 .005
Income Fund .28 .027
Money Market Fund .32 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. (``PMF''), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. (``PMFS''). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Other Transactions with Affiliates
For the year ended September 30, 1995, Prudential Securities Incorporated, an
affiliate of PIFM, earned approximately $1,000 in brokerage commissions from
portfolio transactions executed on behalf of the Balanced Fund.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $166,285,606 $94,901,288
Stock Index Fund 31,191,257 6,793,307
International Stock Fund 51,878,167 22,058,837
Active Balanced Fund 55,254,010 24,449,598
Balanced Fund 51,413,549 41,017,407
Income Fund 72,942,188 62,818,679
</TABLE>
On September 30, 1995, the Stock Index Fund purchased 62 financial futures
contracts on the S&P 500 Index expiring December, 1995. The cost of such
contracts was $18,040,975. The value of such contracts on September 30, 1995 was
$18,234,200, thereby resulting in an unrealized gain of $193,225.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
Depreciation
-------------- Gross Unrealized
Fund Basis Appreciation Depreciation
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $168,492,267 $ 53,882,096 $55,631,552 $1,749,456
Stock Index Fund 80,984,245 15,486,856 16,243,442 756,586
International Stock
Fund 120,016,426 17,315,559 19,620,167 2,304,608
Active Balanced
Fund 121,485,163 12,020,860 12,744,154 723,294
Balanced Fund 74,648,132 6,340,696 6,845,882 505,186
Income Fund 56,738,626 894,526 1,086,048 191,522
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1994 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund $3,796,000 --
International Stock Fund -- $186,000
Income Fund 828,000 --
</TABLE>
55
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
Growth Stock Fund $2,825,300
Income Fund 723,300
The average monthly balance of dollar rolls outstanding during the year ended
September 30, 1995 for the Income Fund was approximately $4,142,000. The amount
of dollar rolls outstanding at September 30, 1995 was $5,940,665, which was
10.2% of total assets.
Note 5. Joint Repurchase Agreement Account
The Company, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At September 30,
1995, the Company had a 9.01% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $65,929,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .66% $ 4,819,000
Stock Index Fund 1.71 12,494,000
International Stock Fund 1.12 8,175,000
Active Balanced Fund 3.50 25,625,000
Balanced Fund 1.00 7,338,000
Income Fund 1.02 7,478,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.375%, in the principal amount of $225,000,000,
repurchase price $225,119,531, due 10/2/95. The value of the collateral
including accrued interest was $229,660,959.
BT Securities Corp., 6.10%, in the principal amount of $56,863,000,
repurchase price $56,891,905, due 10/2/95. The value of the collateral including
accrued interest was $58,082,904.
Goldman, Sachs & Co., 6.45%, in the principal amount of $225,000,000,
repurchase price $225,120,938, due 10/2/95. The value of the collateral
including accrued interest was $229,500,013.
Smith Barney, Inc., 6.43%, in the principal amount of $225,000,000,
repurchase price $225,120,563, due 10/2/95. The value of the collateral
including accrued interest was $229,500,366.
Note 6. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the years ended
September 30, 1995 and 1994 were as follows:
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
56
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Year ended September 30, 1994:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 6,739,890 14,450 (1,804,735) 4,949,605
Stock Index Fund 2,697,792 52,328 (744,579) 2,005,541
International Stock
Fund 6,022,403 42,326 (1,702,734) 4,361,995
Active Balanced Fund 5,244,905 81,781 (1,404,380) 3,922,306
Balanced Fund 3,900,150 118,117 (556,779) 3,461,488
Income Fund 1,613,971 216,368 (809,032) 1,021,307
Money Market Fund 32,311,167 1,277,602 (17,493,001) 16,095,768
</TABLE>
Of the shares outstanding at September 30, 1995, PIFM and affiliates owned
the following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 4,724,608
Stock Index Fund 3,429,256
International Stock Fund 4,962,191
Active Balanced Fund 2,396,951
Balanced Fund 3,356,418
Income Fund 2,889,945
Money Market Fund 27,811,405
</TABLE>
57
<PAGE>
THE PRUDENTIAL INDEPENDENT
(LOGO) INSTITUTIONAL AUDITORS' REPORT
FUND
The Shareholders and Trustees of
The Prudential Institutional Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Prudential Institutional Fund
(consisting of the Growth Stock Fund, Stock Index Fund, International Stock
Fund, Active Balanced Fund, Balanced Fund, Income Fund and Money Market Fund),
as of September 30, 1995, 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 the periods presented. 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
September 30, 1995, 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 each of the
respective portfolios constituting The Prudential Institutional Fund as of
September 30, 1995, the results of their operations, the changes in their net
assets, and the financial highlights for the periods presented in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 16, 1995
58
<PAGE>
THE PRUDENTIAL FEDERAL INCOME
(LOGO) INSTITUTIONAL TAX INFORMATION
FUND
As required by the Internal Revenue Code, we wish to advise you as to the
federal tax status of dividends and distributions paid by the Funds during their
fiscal year ended September 30, 1995.
Detailed below, please find the aggregate dividends and distributions, per
share, paid by each Fund during the fiscal year ended September 30, 1995 as well
as the corporate dividend received deduction percentage:
<TABLE>
<CAPTION>
Ordinary Dividends* Long-Term Total Corporate
------------------------- Capital Dividends Dividend
Short-Term Gains and Received
Fund Income Capital Gains Distributions Distributions Deduction
- ------------------------------------------ ------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Stock Fund $.005 -- -- $.005 100%
Stock Index Fund .215 $.025 $.010 .250 87
International Stock Fund .107 .060 .258 .425 --
Active Balanced Fund .290 .010 .025 .325 23
Balanced Fund .255 .005 .040 .300 24
Income Fund .594 -- -- .594 --
Money Market Fund .053 -- -- .053 --
</TABLE>
* For federal income tax purposes, ordinary income dividends and short-term
capital gains distributions are taxable as ordinary income. Long-term capital
gains distributions are taxable as capital gains income.
59
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
May 20, 1996
We are pleased to provide you with the Semi-Annual Report of The Prudential
Institutional Fund for the six months ended March 31, 1996. A combination of
continued gains in the equity markets, albeit with more volatility, along with
strong cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $957.9 million at March 31, 1996 from $784.9 million at September
30, 1995. The Fund has seven portfolios, each with a distinct investment
objective designed to allow investors the opportunity to select various options
to match different goals and risk tolerances.
Economy
The U.S. economy is growing sluggishly, on the order of 2% per year and
inflation is restrained at just under 3% per year. At the outset of 1996, the
focus of most commentators was on the deceleration of growth at the end of 1995
and the potentially debilitating effects of adverse weather conditions in early
1996. The prevailing fear was that the U.S. was slipping into or possibly
already in the midst of a recession. Sentiment has shifted dramatically and
market commentators are now talking about the ``growth scare'' that is pushing
interest rates higher. The focal point for this shift in sentiment about the
economy was Fed Chairman Greenspan's February statement to Congress on the state
of the economy. Subsequent employment reports that were much better than
expected added to the new sentiment that ``strong'' underlying economic growth
of 2% or more would force interest rates higher.
Market Review
The February shift in sentiment about the economy led to a dramatic shift in
the U.S. stock and bond markets. At that point, the S&P 500 was at its all-time
high of 661 and the yield on 30-year U.S. Treasuries was about 6.0%. Greenspan's
statement can essentially serve as the demarcation point to end the 1995 stock
and bond rallies. From that point until the end of March, long-term treasury
yields rose about 70 basis points to 6.7% and the S&P 500 fluctuated in the 640
to 660 range, ending the period at 645. For the six month period as a whole,
stocks gained nearly 12%, while bonds returned about 2.4% as measured by the
Lehman Aggregate Index.
Foreign stocks, as represented by the Morgan Stanley Europe, Australia and
Far East Index (EAFE) moved in roughly the same pattern as the U.S. stock market
during this six month period but the gain in foreign stocks was a more modest
7%.
Fund Performance
As a result of the continued strength in the financial markets, each of the
Fund's portfolios achieved absolute positive returns for the six month period.
Since each portfolio's inception, returns have been very positive and compare
satisfactorily versus the benchmarks. This performance information and portfolio
holdings along with comments from each portfolio's adviser may be found on the
following pages.
1
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
Summary
The economy and markets are in an uncertain period characterized by
heightened volatility. This underscores our belief that investors need to focus
on the longer-term and continue to exercise a disciplined approach to investing
their retirement savings. We look forward to continuing to provide you with the
investment options and services you need to help you accomplish your goals.
Sincerely,
Mark R. Fetting
President
2
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to realize long-term total return consistent with moderate
portfolio risk.
INVESTMENT APPROACH: Under normal operating
parameters, the Adviser will use the following ranges, as a percentage of total
assets, for each type of security to be purchased by the Fund:
- 25-50% will be invested in common and preferred stocks and other
equity-related securities.
- 30-60% will be invested in investment-grade fixed income securities of
intermediate maturities.
- 0-45% will be invested in money market instruments.
ADVISER: Prudential Diversified Investment Strategies (PDI) is a business unit
of The Prudential Investment Corporation dedicated to equity index and balanced
fund investing for institutional clients. Established in 1975, PDI is among the
oldest quantitatively-oriented balanced managers in the country, currently
managing approximately $22 billion in equity, balanced, and fixed income
accounts.
ADVISER'S COMMENTS: The first half of this Fund's fiscal year from September
30, 1995 through March 31, 1996 witnessed the end of 1995's robust rally in both
the U.S. stock and bond markets, and the beginning of a period of increased
market volatility with more uncertain returns for both stocks and bonds. In
calendar 1995, the stock market gained more than 37% as the S&P 500 Index was
driven steadily higher by strong corporate earnings and declining interest
rates. The 30-year U.S. Treasury bond yield fell steadily during 1995 from
nearly 8% to the 6% level, generating a more than 18% gain in the U.S. bond
market, as represented by the Lehman Aggregate Index.
If we focus only on the first half of the Fund's fiscal year ended March 31,
then long-term interest rates fell from 6.4% at the beginning of the period to
about 6.0% in early February, then shot up to 6.7% at the end of March. The net
rise in interest rates undermined bond returns, limiting them to about 2% for
the six month period. Stocks fared much better. The S&P 500 started the period
at about 580 and even though it slipped from its mid-February high of 661, it
still finished the period at 645. With dividends included, this amounts to
nearly a 12% gain for the half year. Throughout this period, our strategy in the
Balanced Fund was to tilt the portfolio in favor of stocks, with essentially the
maximum 50% of the portfolio allocated to the Fund's stock manager. For this six
month period, the Fund generated a 6.5% return.
We remain moderately optimistic about corporate earnings and the stock market.
However, there is great uncertainty with regard to the outlook for interest
rates and this raises the specter of greater volatility in both the bond and
stock markets for the second half of this fiscal year.
<TABLE>
PERFORMANCE RESULTS:
<CAPTION>
Composite
Periods ended 3/31/96 Fund Index (1)
<S> <C> <C>
------------------------- ------- ----------
Six Months............... 6.53% 6.53%
One Year................. 18.16% 19.92%
From Inception
(11/5/92)................ 11.23% 11.26%
</TABLE>
Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost. Past performance is no guarantee
of future results. The Manager is currently limiting the expenses of the Fund.
Without this reduction of expenses, the total return would have been lower.
(1) The Composite Index is a weighted average as follows: 45% S&P 500; 45%
Lehman Brothers Government/Corporate Index; 10% T-Bill return. For each of the
periods, the Fund, on average, has been invested 45% in stocks, 43% in bonds and
12% in short-terms. The S&P 500 returned 11.71%, 32.10% and 16.73%; the Lehman
Gov't/Corp Index returned 2.21%, 10.93% and 7.30%; and T-Bills returned 2.65%,
5.58% and 4.45% for each period, respectively.
24
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--88.7%
Common Stocks--44.5%
Aerospace/Defense--1.2%
4,200 Allied-Signal, Inc................. $ 248,325
7,600 General Motors Corp., Class H...... 480,700
10,400 Litton Industries, Inc.(a)......... 478,400
-----------
1,207,425
-----------
Automobiles & Trucks--0.5%
23,100 Smith (A.O.) Corp.................. 545,737
-----------
Banking--2.0%
6,300 Bank of Boston Corp................ 312,637
8,400 Bank of New York Co., Inc.......... 432,600
8,578 First Chicago Corp................. 355,987
23,600 Norwest Corp....................... 867,300
-----------
1,968,524
-----------
Chemicals--4.2%
21,000 Agrium, Inc........................ 271,602
9,400 Cytec Industries, Inc.(a).......... 794,300
8,000 duPont (E.I.) de Nemours & Co...... 664,000
7,900 Grace (W.R.) & Co.................. 618,175
Imperial Chemical Inds. (ADR)
8,000 (United Kingdom)................. 456,000
22,700 Mississippi Chemical Corp.......... 459,675
6,600 Olin Corp.......................... 574,200
36,100 Uniroyal Chemical Corp.(a)......... 347,462
-----------
4,185,414
-----------
Chemical-Specialty--0.7%
19,500 Ferro Corp......................... 553,312
3,100 OM Group, Inc...................... 115,088
-----------
668,400
-----------
Communication Equipment--0.3%
13,500 Oak Industries, Inc.(a)............ 335,812
-----------
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Computer Hardware--0.2%
Lexmark International Group,
12,500 Inc.(a).......................... $ 242,188
-----------
Computer Software & Services--0.5%
12,000 Automatic Data Processing, Inc..... 472,500
-----------
Consumer Services--0.7%
17,600 ADT Ltd.(a)........................ 310,200
13,000 Pittston Brinks Group.............. 347,750
-----------
657,950
-----------
Diversified Consumer Products--0.7%
30,000 Whitman Corp....................... 727,500
-----------
Drugs & Medical Supplies--0.5%
8,000 Schering-Plough Corp............... 465,000
-----------
Electrical Equipment--0.5%
15,600 Belden, Inc........................ 460,200
-----------
Electronics--1.5%
28,000 Anixter International, Inc.(a)..... 472,500
6,000 Emerson Electric Co................ 484,500
5,600 Marshall Industries(a)............. 170,800
10,600 SGS-Thomson Microelectronics
N.V.(a) (France)................. 384,250
-----------
1,512,050
-----------
Enginerring & Construction--0.9%
32,000 Giant Cement Holding, Inc.(a)...... 404,000
21,400 Martin Marietta Corp............... 486,850
-----------
890,850
-----------
Exploration & Production--1.7%
19,400 Cabot Oil & Gas Corp............... 276,450
30,000 Cross Timbers Oil Co............... 517,500
12,900 Enron Oil and Gas Corp............. 340,237
11,000 Parker & Parsley Petroleum Co...... 253,000
6,700 Seagull Energy Corp.(a)............ 151,588
10,500 Vintage Petroleum, Inc............. 213,938
-----------
1,752,713
-----------
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services--1.2%
12,400 Dean Witter Discover & Co.......... $ 709,900
8,600 Finova Group, Inc.................. 469,775
-----------
1,179,675
-----------
Hospital Management--1.1%
Community Health Systems,
4,700 Inc.(a).......................... 192,700
7,000 Quorum Health Group(a)............. 164,500
33,000 Tenet Healthcare Corp.(a).......... 693,000
-----------
1,050,200
-----------
Household Products--0.3%
13,000 Libbey, Inc........................ 284,375
-----------
Housing Related--1.5%
13,000 Ethan Allen Interiors, Inc.(a)..... 341,250
Furniture Brands International,
33,000 Inc.............................. 305,250
16,000 Owens Corning Fiberglas Corp.(a)... 642,000
9,000 USG Corp.(a)....................... 228,375
-----------
1,516,875
-----------
Insurance--4.0%
8,600 Allmerica Financial Corp........... 226,825
9,000 Berkley (W. R.) Corp............... 416,250
10,500 Equitable Iowa Cos................. 375,375
10,000 NAC Re Corp........................ 326,250
9,700 National Re Corp................... 327,375
15,400 Penncorp Financial Group, Inc...... 485,100
Reinsurance Group of America,
21,000 Inc.............................. 769,125
15,000 TIG Holdings, Inc.................. 487,500
6,000 Travelers, Inc..................... 396,000
12,900 Western National Corp.............. 209,625
-----------
4,019,425
-----------
Integrated Producers--0.7%
20,000 Total S.A. (ADR) (France).......... 680,000
-----------
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Machinery--2.8%
18,000 Applied Power, Inc................. $ 587,250
Gardner Denver Machinery,
26,000 Inc.(a).......................... 617,500
Global Industrial Technologies,
26,000 Inc.............................. 624,000
8,200 Harnischfeger Industries, Inc...... 317,750
9,000 Sundstrand Corp.................... 366,750
6,900 Varity Corp.(a).................... 298,425
-----------
2,811,675
-----------
Media--3.0%
20,000 Comcast Corp. Class A.............. 347,500
14,900 Cox Communications, Inc.(a)........ 325,938
3,600 Gannett Co., Inc................... 242,100
18,800 Hollinger International, Inc....... 225,600
6,900 Knight-Ridder, Inc................. 470,062
29,200 Tele Communications, Inc., Ser. A,
TCI Group(a)..................... 542,025
7,300 Telecom Inc. Liberty Media......... 192,537
10,000 Time Warner, Inc................... 408,750
8,237 Times Mirror Co.................... 324,332
-----------
3,078,844
-----------
Metals - Non Ferrous--0.3%
6,800 UCAR International, Inc.(a)........ 264,350
-----------
Miscellaneous Basic Industry--6.0%
15,400 Coltec Inds., Inc.(a).............. 186,725
8,700 Crane Co........................... 351,263
5,000 Danaher Corp....................... 185,000
Fisher Scientific International,
15,000 Inc.............................. 573,750
7,000 FMC Corp.(a)....................... 525,875
29,700 Hanson PLC (ADR)
(United Kingdom)................. 445,500
10,000 IDEX Corp.......................... 388,750
9,000 Illinois Tool Works, Inc........... 581,625
9,000 Kennametal, Inc.................... 325,125
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Miscellaneous Basic Industry, cont'd.
19,760 Mark IV Industries, Inc............ $ 434,720
14,000 Pentair, Inc....................... 353,500
20,000 Tyco International Ltd............. 715,000
19,100 United Dominion Inds............... 463,175
11,000 York International Corp............ 539,000
-----------
6,069,008
-----------
Office Equipment & Supplies--0.5%
1,700 Honeywell, Inc..................... 93,925
International Business Machines
3,500 Corp............................. 388,937
-----------
482,862
-----------
Petroleum--0.7%
18,000 Occidental Petroleum Corp.......... 481,500
Santa Fe Energy Resources,
21,600 Inc.(a).......................... 226,800
-----------
708,300
-----------
Petroleum Services--0.6%
41,000 Oryx Energy Co.(a)................. 568,875
-----------
Railroads--1.6%
6,400 Burlington Northern Inc............ 525,600
11,600 Canadian Pacific Ltd............... 232,000
13,350 Illinois Central Corp.............. 380,475
7,000 Union Pacific Corp................. 480,375
-----------
1,618,450
-----------
Retail--1.6%
16,300 Best Products, Inc.(a)............. 38,713
10,100 Dillard Department Stores, Inc..... 349,712
4,900 Eckerd Corp.(a).................... 235,812
11,800 Harcourt General, Inc.............. 535,425
8,500 May Department Stores Co........... 410,125
-----------
1,569,787
-----------
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Rubber--0.2%
4,500 Goodyear Tire & Rubber Co.......... $ 229,500
-----------
Telecommunications--1.3%
20,700 Frontier Corp...................... 652,050
20,900 MCI Communications Corp............ 632,225
-----------
1,284,275
-----------
Trucking & Shipping--0.3%
12,900 Pittston Burlington Company........ 253,163
-----------
Utility-Communications--0.7%
9,100 Airtouch Communications, Inc.(a)... 283,238
5,900 AT&T Corp.......................... 361,375
-----------
644,613
-----------
Total common stocks
(cost $35,215,626)................. 44,406,515
-----------
Principal
Amount
(000) DEBT OBLIGATIONS--44.2%
- --------
Asset Backed Securities--3.2%
American Express Master Trust,
Series 1994-3, Class A,
$ 430 7.85%, 8/15/05..................... 454,858
Chemical Credit Card Trust,
Series 1995-3, Class A,
400 6.23%, 4/15/05..................... 392,872
Circuit City Credit Card Master
Trust,
Series 1994-2, Class A,
300 8.00%, 11/15/03.................... 315,094
Discover Card Master Trust I,
Series 1994-1, Class A,
400 6.70%, 2/16/00..................... 404,000
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Asset Backed Securities, cont'd.
Nationsbank Credit Card Master
Trust,
Series 1993-2, Class A,
$ 400 6.00%, 12/15/05.................. $ 383,624
Prime Credit Card Master Trust,
Series 1995-1, Class A,
400 6.75%, 11/15/05.................. 401,872
Sears Credit Account Master Trust
II,
Series 1995-5, Class A,
500 6.05%, 1/16/08................... 484,840
Standard Credit Card Master
Trust,
Series 1995-1, Class A,
400 8.25%, 1/7/07.................... 433,624
------------
Total asset backed securities
(cost $3,340,011)................ 3,270,784
------------
Corporate Bonds--8.2%
African Development Bank,
400 7.70%, 7/15/02................... 419,316
(Banking)
American General Finance Corp.,
400 7.25%, 5/15/05................... 406,168
(Financial Services)
Caterpillar, Inc.,
250 9.375%, 7/15/00.................. 274,450
(Industrials)
Comdisco Inc.,
300 6.50%, 6/15/00................... 298,329
(Commercial Services)
Commercial Credit Group, Inc.,
200 7.875%, 7/15/04.................. 211,666
(Financial Services)
Disney, (Walt) Co.,
400 6.75%, 3/30/06................... 398,212
(Leisure)
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Federal Express Corp.,
$ 350 10.00%, 9/1/98................... $ 377,272
(Trucking & Shipping)
Finova Capital Corp.,
300 6.28%, 11/1/99................... 296,676
100 6.30%, 11/1/99................... 98,955
(Financial Services)
Ford Motor Credit Co.,
400 9.375%, 12/15/97................. 419,824
320 7.50%, 6/15/04................... 329,683
(Financial Services)
General Motors Acceptance Corp.,
450 9.625%, 5/15/00.................. 497,322
(Financial Services)
Greyhound Financial Corp.,
100 8.50%, 5/1/98.................... 104,033
(Financial Services)
Hanson PLC.,
400 7.375%, 1/15/03.................. 407,572
(Miscellaneous Basic Industry)
(United Kingdom)
Hydro Quebec Corp.,
250 8.40%, 1/15/22................... 266,958
(Utilities) (Canada)
Lehman Brothers, Inc.,
200 7.125%, 7/15/02.................. 200,592
(Financial Services)
Nationsbank Corp.,
500 6.50%, 3/15/06................... 482,110
(Banking)
Norwest Corp.,
300 7.125%, 4/1/00................... 306,111
(Banking)
Petroliam Nasional Berhad,
500 6.875%, 7/1/03................... 496,565
(Petroleum) (Malaysia)
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Corporate Bonds, cont'd.
Salomon, Inc.,
$ 200 8.64%, 2/27/98................... $ 205,838
(Financial Services)
Sears Roebuck & Co.,
100 9.48%, 7/24/01................... 112,375
(Retail)
Sears Roebuck Acceptance Corp.,
300 6.75%, 9/15/05................... 294,978
(Financial Services)
Tenneco Credit Corp.,
600 9.625%, 8/15/01.................. 673,164
(Financial Services)
Texas Utilities Co.,
300 6.375%, 8/1/97................... 300,612
(Utilities)
Union Oil Co.,
300 7.75%, 4/20/05 ................. 310,131
(Petroleum) ------------
Total corporate bonds
(cost $8,245,157)................ 8,188,912
------------
Sovereign Bond--0.3%
Republic of Italy
6.875%, 9/27/23
300 (cost $278,274)................ 269,193
------------
U.S. Government Securities--32.5%
United States Treasury Bond,
5,150 11.25%, 2/15/15.................. 7,568,080
United States Treasury Notes,
4,100 5.375%, 5/31/98.................. 4,062,198
3,900 6.375%, 1/15/99.................. 3,943,875
2,900 7.50%, 10/31/99.................. 3,035,024
1,600 6.375%, 1/15/00.................. 1,619,248
350 6.875%, 3/31/00.................. 359,733
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
United States Treasury Notes,
$ 500 6.125%, 7/31/00.................. $ 500,310
6,600 6.25%, 2/15/03................... 6,580,398
4,500 7.25%, 8/15/04................... 4,747,500
------------
Total U.S. Government securities
(cost $32,455,321)............... 32,416,366
------------
Total debt obligations
(cost $44,318,763)............... 44,145,255
------------
Total long-term investments
(cost $79,534,389)............... 88,551,770
------------
SHORT-TERM INVESTMENTS--10.8%
Corporate Bond--0.4%
400 General Electric Capital Corp.,
8.75%, 11/26/96 ................
(Financial Services)
407,176
------------
Repurchase Agreement--10.4%
10,344 Joint Repurchase Agreement Account,
5.35%, 04/01/96 (Note 4)......... 10,344,000
------------
Total short-term investments
(cost $10,747,456)............... 10,751,176
------------
Total Investments--99.5%
(cost $90,281,845; Note 3)....... 99,302,946
Other assets in excess of
liabilities--0.5%.............. 501,089
------------
Net Assets--100%................. $ 99,804,035
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
29
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND MARCH 31, 1996
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments, at value
(a)...................... $288,473,390 $147,528,594 $163,631,126 $141,973,548 $99,302,946 $64,948,809 $60,050,002
Cash....................... 571 -- 365 3,578 2,454 344 664
Foreign currency, at value
(cost $120,455).......... -- -- 120,201 -- -- -- --
Receivable for investments
sold..................... 1,843,811 110,805 -- 159,396 222,356 -- --
Interest and dividends
receivable............... 244,056 237,503 486,827 694,471 662,192 679,143 423,064
Receivable for Fund shares
sold..................... 836,874 419,537 507,136 469,950 397,983 60,429 47,347
Deferred expenses and other
assets................... 22,618 21,921 22,047 23,402 21,788 25,157 23,503
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total assets........... 291,421,320 148,318,360 164,767,702 143,324,345 100,609,719 65,713,882 60,544,580
------------ ------------ ------------- ------------ ----------- ----------- -----------
Liabilities
Payable for investments
purchased................ 1,894,523 780,201 1,838,999 505,568 555,826 8,346,485 387,225
Payable for Fund shares
reacquired............... 379,951 350,236 440,038 2,721 151,391 6,891 195,043
Accrued expenses........... 59,193 56,018 104,667 27,875 33,386 17,866 17,517
Due to broker - variation
margin................... -- 29,750 -- -- -- -- --
Management fee payable..... 184,161 1,164 159,906 84,218 54,094 10,568 7,913
Administration fee
payable.................. 32,006 16,314 17,912 15,912 10,987 6,426 6,699
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total liabilities...... 2,549,834 1,233,683 2,561,522 636,294 805,684 8,388,236 614,397
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Assets................. $288,871,486 $147,084,677 $162,206,180 $142,688,051 $99,804,035 $57,325,646 $59,930,183
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 16,906 $ 9,836 $ 10,275 $ 11,342 $ 7,936 $ 5,781 $ 59,930
Paid-in capital in excess
of par................... 223,817,874 119,565,666 140,973,229 124,739,121 88,818,388 57,616,118 59,870,253
------------ ------------ ------------- ------------ ----------- ----------- -----------
223,834,780 119,575,502 140,983,504 124,750,463 88,826,324 57,621,899 59,930,183
Undistributed net
investment income
(loss)................... (362,804) 536,299 183,078 1,026,586 671,956 -- --
Accumulated net realized
gain (loss) on
investments.............. 2,165,314 596,539 (364,666 ) 3,304,353 1,284,654 (179,120) --
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 63,234,196 26,376,337 21,404,264 13,606,649 9,021,101 (117,133) --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets, March 31,
1996..................... $288,871,486 $147,084,677 $162,206,180 $142,688,051 $99,804,035 $57,325,646 $59,930,183
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Shares of beneficial
interest issued and
outstanding.............. 16,906,186 9,835,809 10,275,205 11,341,527 7,936,350 5,780,560 59,930,183
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net asset value per
share.................... $ 17.09 $ 14.95 $ 15.79 $ 12.58 $ 12.58 $ 9.92 $ 1.00
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a) Identified cost........ $225,239,430 $121,196,832 $142,221,274 $128,366,899 $90,281,845 $65,065,943 $60,050,002
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................. $ 142,475 $ 222,810 $ 299,227 $ 2,194,088 $ 1,500,344 $ 1,839,465 $ 1,716,542
Dividends (a)............ 835,346 1,295,809 1,257,014 610,799 246,391 -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total income........... 977,821 1,518,619 1,556,241 2,804,887 1,746,735 1,839,465 1,716,542
------------ ------------ ------------- ------------ ----------- ----------- -----------
Expenses
Management fee........... 885,234 242,455 828,186 482,513 312,574 139,295 132,163
Administration fee....... 168,078 80,560 95,715 91,614 59,348 37,027 38,798
Custodian's fees and
expenses................. 46,000 68,000 138,000 38,000 34,000 30,000 29,000
Registration fees........ 34,000 20,000 17,000 28,000 12,000 14,000 11,000
Transfer agent's fees and
expenses............... 28,969 13,885 16,497 15,790 10,229 6,382 6,964
Reports to
shareholders............. 15,000 15,000 15,000 7,500 15,000 7,500 7,500
Legal fees............... 7,500 7,500 7,500 7,500 7,500 7,500 7,500
Amortization of
organization
expenses............... 6,693 6,693 6,693 6,606 6,693 6,525 6,606
Audit fee................ 6,000 5,000 7,500 6,000 5,000 5,000 4,500
Trustees' fees........... 6,000 6,000 6,000 6,000 6,000 6,000 6,000
Miscellaneous............ 1,762 769 1,337 919 753 790 1,188
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total expenses......... 1,205,236 465,862 1,139,428 690,442 469,097 260,019 251,219
Expense recovery
(subsidy) (Note 2)..... 59,383 (102,179) 12,836 (1,136) (22,563) (65,010) (75,031)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net expenses............... 1,264,619 363,683 1,152,264 689,306 446,534 195,009 176,188
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net investment income
(loss)................... (286,798) 1,154,936 403,977 2,115,581 1,300,201 1,644,456 1,540,354
------------ ------------ ------------- ------------ ----------- ----------- -----------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss) on:
Securities
transactions............. 5,181,317 329,077 2,870,670 3,822,493 1,674,656 553,480 774
Financial futures
contracts................ -- 706,645 -- -- -- -- --
Foreign currency
transactions............. (76,006) -- (63,741 ) -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
5,105,311 1,035,722 2,806,929 3,822,493 1,674,656 553,480 774
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 9,168,246 10,803,505 4,083,056 1,492,196 2,639,177 (1,011,659) --
Financial futures
contracts................ -- (148,650) -- -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
9,168,246 10,654,855 4,083,056 1,492,196 2,639,177 (1,011,659) --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net gain (loss) on
investments and foreign
currencies............... 14,273,557 11,690,577 6,889,985 5,314,689 4,313,833 (458,179) 774
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................. $ 13,986,759 $ 12,845,513 $7,293,962 $ 7,430,270 $ 5,614,034 $ 1,186,277 $ 1,541,128
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a) Net of foreign withholding taxes of $17,997, $1,988, $160,696, $1,168 and $4,070, respectively.
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND (UNAUDITED)
<TABLE>
<CAPTION>
MONEY
BALANCED INCOME MARKET
FUND FUND FUND
------------------------------ ----------------------------- ------------------------------
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
March 31, September 30, March 31, September 30, March 31, September 30,
1996 1995 1996 1995 1996 1995
------------ ------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment
income............... $ 1,300,201 $ 2,258,681 $ 1,644,456 $ 2,862,527 $ 1,540,354 $ 2,813,967
Net realized gain on
investments and
foreign currency
transactions......... 1,674,656 2,196,076 553,480 92,951 774 --
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 2,639,177 6,413,335 (1,011,659) 2,865,097 -- --
------------ ------------- ----------- ------------- ------------ -------------
Net increase in net
assets resulting from
operations........... 5,614,034 10,868,092 1,186,277 5,820,575 1,541,128 2,813,967
------------ ------------- ----------- ------------- ------------ -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (2,334,680) (1,529,788) (1,644,456) (2,862,527) (1,541,128) (2,813,967)
Distributions to
shareholders from net
realized gains....... (2,472,014) (269,963) -- -- -- --
------------ ------------- ----------- ------------- ------------ -------------
Total dividends and
distributions........ (4,806,694) (1,799,751) (1,644,456) (2,862,527) (1,541,128) (2,813,967)
------------ ------------- ----------- ------------- ------------ -------------
Fund share transactions
Net proceeds from
shares sold.......... 21,877,936 26,091,264 7,888,653 11,549,255 22,399,365 55,919,976
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 4,806,694 1,799,751 1,644,456 2,862,527 1,541,128 2,813,967
Cost of shares
redeemed............. (9,797,881) (19,161,993) (4,046,651) (6,473,780) (22,064,387) (47,010,598)
------------ ------------- ----------- ------------- ------------ -------------
Net increase in net
assets from Fund
share transactions... 16,886,749 8,729,022 5,486,458 7,938,002 1,876,106 11,723,345
------------ ------------- ----------- ------------- ------------ -------------
Net increase............ 17,694,089 17,797,363 5,028,279 10,896,050 1,876,106 11,723,345
Net Assets
Beginning of period.... 82,109,946 64,312,583 52,297,367 41,401,317 58,054,077 46,330,732
------------ ------------- ----------- ------------- ------------ -------------
End of period.......... $ 99,804,035 $82,109,946 $57,325,646 $52,297,367 $ 59,930,183 $58,054,077
------------ ------------- ----------- ------------- ------------ -------------
------------ ------------- ----------- ------------- ------------ -------------
</TABLE>
See Notes to Financial Statements.
40
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL (UNAUDITED)
FUND
<TABLE>
<CAPTION>
BALANCED INCOME
FUND FUND
--------------------------------------------------------- ------------------------
November 5, Year
Six Months Year Ended September 30, 1992(a) Six Months Ended
Ended Through Ended September
March 31, ------------------------ September 30, March 31, 30,
1996 1995 1994 1993 1996 1995
---------- --------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period.................. $ 12.49 $ 11.08 $ 11.80 $ 10.00 $ 9.98 $ 9.38
---------- --------- --------- ---------- ---------- ---------
Income from investment
operations:
Net investment income(b).... .17 .18 .31 .31 .29 .59
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions............... .62 1.53 (.52) 1.54 (.06) .60
---------- --------- --------- ---------- ---------- ---------
Total from investment
operations............... .79 1.71 (.21) 1.85 .23 1.19
---------- --------- --------- ---------- ---------- ---------
Less distributions:
Dividends from net
investment income.......... (.34) (.25) (.23) (.05) (.29) (.59)
Distributions from net
realized gains............. (.36) (.05) (.28) -- -- --
---------- --------- --------- ---------- ---------- ---------
Total distributions........ (.70) (.30) (.51) (.05) (.29) (.59)
---------- --------- --------- ---------- ---------- ---------
Net asset value, end of
period..................... $ 12.58 $ 12.49 $ 11.08 $ 11.80 $ 9.92 $ 9.98
---------- --------- --------- ---------- ---------- ---------
---------- --------- --------- ---------- ---------- ---------
TOTAL RETURN(d)............. 6.53% 15.90% (1.88)% 18.58% 2.35% 13.11%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(000)...................... $ 99,804 $82,110 $64,313 $27,663 $ 57,326 $52,297
Average net assets (000).... $ 89,307 $70,914 $44,048 $17,401 $ 55,718 $46,386
Ratios to average
net assets: (b)
Expenses................... 1.00%(c) 1.00% 1.00% 1.00%(c) .70%(c) .70%
Net investment income...... 2.91%(c) 3.19% 2.86% 3.16%(c) 5.90%(c) 6.17%
Portfolio turnover rate..... 37% 65% 52% 74% 53% 145%
Average commission rate paid
per share.................. $ 0.0597 N/A N/A N/A N/A N/A
<CAPTION>
Year March 1,
Ended 1993(a)
September Through
30, September 30,
1994 1993
--------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period.................. $ 10.33 $ 10.00
--------- ----------
Income from investment
operations:
Net investment income(b).... .52 .27
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions............... (.91) .33
--------- ----------
Total from investment
operations............... (.39) .60
--------- ----------
Less distributions:
Dividends from net
investment income.......... (.52) (.27)
Distributions from net
realized gains............. (.04) --
--------- ----------
Total distributions........ (.56) (.27)
--------- ----------
Net asset value, end of
period..................... $ 9.38 $ 10.33
--------- ----------
--------- ----------
TOTAL RETURN(d)............. (3.91)% 6.11%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(000)...................... $41,401 $35,015
Average net assets (000).... $37,802 $25,626
Ratios to average
net assets: (b)
Expenses................... .70% .70%(c)
Net investment income...... 5.24% 4.62%(c)
Portfolio turnover rate..... 83% 93%
Average commission rate paid
per share.................. N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
See Notes to Financial Statements.
43
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
The Prudential Institutional Fund (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. (``PIFM'').
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a
45
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
recognized bank or dealer. Forward currency exchange contracts shall be valued
at the current cost of covering or offsetting such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company'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 Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
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. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars.
46
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
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 rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal period. Similarly, the
Funds do 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, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at period end exchange rates are reflected as a component
of net unrealized appreciation/
depreciation on securities and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the ``ex-dividend'' date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement
47
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
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 March 31, 1996, the application of this statement
affected undistributed net investment income (``UNI'') and accumulated net
realized gain (loss) on investments (``G/L'') by the following amounts:
<TABLE>
<CAPTION>
UNI G/L
-------- -------
<S> <C> <C>
Growth Stock Fund $(76,006) $76,006
International Stock Fund (63,741) 63,741
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation (``PIC''), Jennison Associates Capital Corp. (``Jennison'') and
Mercator Asset Management, L.P. (``Mercator''). PIC and Jennison are
wholly-owned subsidiaries of Prudential. Each subadviser will furnish investment
advisory services in connection with the management of the various Funds.
Jennison serves as subadviser to the Growth Stock Fund and the Active Balanced
Fund. PIC serves as subadviser to the Balanced Fund, the Stock Index Fund, the
Income Fund and the Money Market Fund. Mercator serves as subadviser to the
International Stock Fund. PIFM will pay for the costs and expenses attributable
to the subadvisory agreements and the salaries and expenses of all personnel of
the Company except for fees and expenses of unaffiliated Trustees. The Funds
will bear all other costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
<TABLE>
<CAPTION>
Fund Management Fee
- -------------------------- ---------------
<S> <C>
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
</TABLE>
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so long as the total expense ratios do not exceed
certain predetermined levels set forth in the Company's prospectus. For the six
months ended March 31, 1996, PIFM subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- --------------------------- ------------- ------------------
<S> <C> <C>
Stock Index Fund .17% $ .011
Active Balanced Fund .002 .0001
Balanced Fund .05 .003
Income Fund .23 .011
Money Market Fund .25 .001
</TABLE>
48
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
PIFM also recovered the following amounts of operating expenses it previously
subsidized for the six months ended March 31, 1996:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Net Assets Share
------------- ------------------
<S> <C> <C>
Growth Stock Fund .05% $ .004
International Stock Fund .02 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. (``PMF''), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. (``PMFS''). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the six months ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $125,001,676 $72,554,977
Stock Index Fund 47,804,297 948,671
International Stock Fund 28,187,107 11,866,927
Active Balanced Fund 28,778,511 23,901,019
Balanced Fund 40,800,913 29,694,202
Income Fund 30,157,486 28,424,962
</TABLE>
On March 31, 1996, the Stock Index Fund purchased 17 financial futures
contracts on the S&P 500 Index expiring June, 1996. The cost of such contracts
was $5,491,050. The value of such contracts on March 31, 1996 was $5,535,625,
thereby resulting in an unrealized gain of $44,575.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
(Depreciation)
--------------- Gross Unrealized
Fund Basis Appreciation Depreciation
- ------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $225,390,343 $63,083,047 $66,420,094 $3,337,047
Stock Index Fund 121,241,374 26,287,220 27,491,663 1,204,443
International
Stock Fund 142,221,274 21,409,852 25,461,090 4,051,238
Active Balanced
Fund 128,545,569 13,427,979 13,990,099 562,120
Balanced Fund 90,294,873 9,008,073 9,842,011 833,938
Income Fund 65,076,580 (127,771) 544,801 672,572
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1995 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
<TABLE>
<S> <C>
Growth Stock Fund $2,825,300
Income Fund 723,300
</TABLE>
The average monthly balance of dollar rolls outstanding during the six months
ended March 31, 1996 for the Income Fund was approximately $6,397,000. The
maximum amount of dollar rolls outstanding at any month-end during the six
months ended March 31, 1996 was $6,991,530 as of January 31, 1996 which was
10.8% of total assets. The amount of dollar rolls outstanding at March 31, 1996,
was $6,723,720, which was 10.2% of total assets.
49
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
Note 4. Joint Repurchase Agreement Account
The Company, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At March 31,
1996, the Company had a 4.60% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $67,021,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .28% $ 4,122,000
Stock Index Fund .41 5,929,000
International Stock Fund .77 11,189,000
Active Balanced Fund 1.64 23,888,000
Balanced Fund .71 10,344,000
Income Fund .79 11,549,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 5.30%, in the principal amount of $387,000,000,
repurchase price $387,170,925, due 4/1/96. The value of the collateral including
accrued interest was $395,137,122.
CS First Boston Corp., 5.50%, in the principal amount of $150,000,000,
repurchase price $150,068,750, due 4/1/96. The value of the collateral including
accrued interest was $153,001,819.
Goldman Sachs & Co., 5.40%, in the principal amount of $463,000,000,
repurchase price $463,208,350, due 4/1/96. The value of the collateral including
accrued interest was $472,260,747.
Nomura Securities, Inc., 5.375%, in the principal amount of $100,000,000,
repurchase price $100,044,792, due 4/1/96. The value of the collateral including
accrued interest was $102,398,695.
Smith Barney, Inc., 5.284%, in the principal amount of $355,886,000,
repurchase price $356,042,708, due 4/1/96. The value of the collateral including
accrued interest was $363,004,234.
Note 5. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the six months ended
March 31, 1996 and the year ended September 30, 1995 were as follows:
Six months ended March 31, 1996:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 8,107,640 -- (4,805,656) 3,301,984
Stock Index Fund 3,893,782 467,712 (1,694,486) 2,667,008
International Stock
Fund 3,795,911 116,606 (2,601,769) 1,310,748
Active Balanced Fund 1,438,229 483,285 (1,283,160) 638,354
Balanced Fund 1,748,784 395,938 (784,163) 1,360,559
Income Fund 780,386 162,743 (400,473) 542,656
Money Market Fund 22,399,365 1,541,128 (22,064,387) 1,876,106
</TABLE>
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
50
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
Of the shares outstanding at March 31, 1996, PIFM and affiliates owned the
following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 5,800,387
Stock Index Fund 4,642,203
International Stock Fund 5,647,337
Active Balanced Fund 2,485,468
Balanced Fund 3,883,087
Income Fund 2,975,746
Money Market Fund 28,544,777
</TABLE>
Note 6. Proposed Reorganization
On May 17, 1996, the Trustees of the Fund approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Fund. Under the Plan of
Reorganization, substantially all of the assets and liabilities of the Growth
Stock Fund, Balanced Fund, Income Fund and Money Market Fund will be transferred
at net asset value for equivalent value Class Z shares of Prudential Jennison
Fund, Inc., Prudential Allocation Fund (Balanced Portfolio), Prudential
Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Funds will then cease operations. Stock Index Fund and
Active Balanced Fund will remain with The Prudential Institutional Fund (to be
renamed the Prudential Dryden Fund) as Class Z shares. Active Balanced Fund will
begin offering Classes A, B and C shares and Stock Index Fund will offer Class A
shares. International Stock Fund will join the Prudential Global Fund as a
separate series of a newly named Prudential World Fund. The existing
shareholders will become Class Z shareholders and the Fund will also begin
offering Classes A, B and C shares. The successor funds will be managed by PMF,
PMFS will provide transfer agency services and Prudential Securities
Incorporated, a wholly-owned subsidiary of Prudential, will act as distributor.
The Plan of Reorganization requires the approval of shareholders of the Fund
to become effective. A proxy will be mailed to shareholders of the Fund for
shareholder meetings in the fall of 1996. If the Plan of Reorganization is
approved, it is expected that the reorganizations will take place shortly after
the meetings. All funds involved will share pro rata in the costs of the
reorganizations.
51
