<PAGE>
As filed with the Securities and Exchange Commission on September 26, 1997
Securities Act Registration No. 33-12531
Investment Company Act Registration No. 811-5055
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 19 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 21 /X/
(CHECK APPROPRIATE BOX OR BOXES)
--------------
PRUDENTIAL BALANCED FUND
(formerly Prudential Allocation Fund)
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
--------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
previously registered an indefinite number of shares of beneficial interest, par
value $.01 per share. The Registrant will file a notice for its fiscal year
ended July 31, 1997 on or before September 29, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- --------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page..................................................... Cover Page
Item 2. Synopsis....................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information................................ Fund Expenses; Financial Highlights;
General Information
Item 4. General Description of Registrant.............................. Cover Page; How the Fund Invests; General
Information
Item 5. Management of the Fund......................................... Financial Highlights; How the Fund is
Managed; General Information
Item 5A. Management's Discussion of Fund Performance.................... Financial Highlights
Item 6. Capital Stock and Other Securities............................. Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................... Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase....................................... Shareholder Guide; General Information
Item 9. Pending Legal Proceedings...................................... Not Applicable
PART B
Item 10. Cover Page..................................................... Cover Page
Item 11. Table of Contents.............................................. Table of Contents
Item 12. General Information and History................................ General Information; Organization and
Capitalization
Item 13. Investment Objectives and Policies............................. Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund......................................... Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities............ Not Applicable
Item 16. Investment Advisory and Other Services......................... Manager; Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Practices....................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities............................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered... Purchase and Redemption of Fund Shares;
Shareholder Investment Account; Net Asset
Value
Item 20. Tax Status..................................................... Taxes, Dividends and Distributions
Item 21. Underwriters................................................... Distributor
Item 22. Calculation of Performance Data................................ Performance Information
Item 23. Financial Statements........................................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of
this Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL BALANCED FUND
(formerly Prudential Allocation Fund)
- --------------------------------------------------------------------------------
PROSPECTUS DATED , 1997
- ----------------------------------------------------------------
Prudential Balanced Fund (the Fund) is an open-end, diversified, management
investment company. The investment objective of the Fund is to achieve a high
total investment return consistent with moderate risk. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities (including securities convertible into equity securities), debt
obligations and money market instruments. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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 , 1997, 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 NOR HAS THE 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 BALANCED FUND?
Prudential Balanced 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 IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund is to achieve a high total investment
return consistent with moderate risk. The Fund 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
Fund's objective will be achieved. See "How the Fund Invests-- Investment
Objective and Policies" at page 9.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund may invest up to 25% of its total assets in securities rated Ba
or lower by Moody's Investors Service, Inc. (Moody's) or BB or lower by
Standard & Poor's Ratings Group (S&P). The Fund also will 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 Objective and Policies" at page 9. In
addition, the Fund may engage in various hedging strategies, including using
derivatives. These activities may be considered speculative and may result
in higher risks and costs to the Fund. See "How the Fund Invests--Hedging
and Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 13. As with an investment in any mutual fund, an
investment in this Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM 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 the Fund. As of , 1997,
PIFM served as manager or administrator to investment companies, including
mutual funds, with aggregate assets of approximately $ billion. The
Prudential Investment Corporation, which does business under the name of
Prudential Investments (PI, the Subadviser or the investment adviser),
furnishes investment advisory services in connection with the management of
the Fund under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 18.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .25 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B and Class C shares at
an annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. Prudential Securities incurs the expenses of
distributing the Fund's Class Z shares under a Distribution Agreement with
the Fund, none of which is reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" at page 19.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. 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 25 and
"Shareholder Guide--Shareholder Services" at page 35.
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 LLC (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). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 21
and "Shareholder Guide--How to Buy Shares of the Fund" at page 25.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four 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.
- Class Z Shares:
Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 26.
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
30.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any,
quarterly and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that
they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 22.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------ --------------------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price)..................... 5% None None None
Maximum Sales Load Imposed
on Reinvested Dividends.... None None None None
Maximum 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 None
decreasing by 1% annually to within one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Redemption Fees............. None None None None
Exchange Fee................ None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
SHARES SHARES SHARES SHARES
------- ------- ------- -------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.................... .65% .65% .65% .65%
12b-1 Fees (After Reduction)....... .25 ++ 1.00 1.00 None
Other Expenses..................... .27 .27 .27 .27
------- ------- ------- -------
Total Fund Operating Expenses
(After Reduction)................. 1.17% 1.92% 1.92% .92%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
Class A............................ $ 61 $ 85 $ 111 $ 185
Class B............................ $ 69 $ 90 $ 114 $ 196
Class C............................ $ 29 $ 60 $ 104 $ 224
Class Z............................ $ 9 $ 29 $ 51 $ 113
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................ $ 61 $ 85 $ 111 $ 185
Class B............................ $ 19 $ 60 $ 104 $ 196
Class C............................ $ 19 $ 60 $ 104 $ 224
Class Z............................ $ 9 $ 29 $ 51 $ 113
</TABLE>
The above example is based on data for the Fund's fiscal year ended July
31, 1997. 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 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.
- ---------------
* 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 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 the Fund, the Distributor has
agreed to limit its distribution fees with respect to the Class A shares
of the Fund 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, 1998. Total Fund
Operating Expenses without such limitation would be 1.22%. See "How the
Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights for the year ended July 31, 1997, have been
audited by Price Waterhouse LLP, independent accountants, and for the five years
ended July 31, 1996, have been audited by Deloitte & Touche LLP, independent
auditors, whose reports thereon were 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. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED JULY 31, THROUGH
--------------------------------------------------------------- JULY 31,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.85 $ 12.04 $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23 $ 9.83
-------- -------- -------- ------- ------- ------- ------ -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .34 .31 .34 .33 .43 .44 .44 .26
Net realized and unrealized gain (loss) on
investment transactions......................... 2.96 .28 1.11 (.05) 1.16 .81 .73 .38
-------- -------- -------- ------- ------- ------- ------ -----------
Total from investment operations.................. 3.30 .59 1.45 .28 1.59 1.25 1.17 .64
-------- -------- -------- ------- ------- ------- ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.36) (.29) (.33) (.37) (.37) (.44) (.44) (.24)
Distributions from net realized gains on
investment and foreign currency transactions.... (.78) (.49) (.20) (.54) (.47) (.54) (.23) --
-------- -------- -------- ------- ------- ------- ------ -----------
Total distributions............................... (1.14) (.78) (.53) (.91) (.84) (.98) (.67) (.24)
-------- -------- -------- ------- ------- ------- ------ -----------
Net asset value, end of period.................... $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75 $ 11.00 $10.73 $10.23
-------- -------- -------- ------- ------- ------- ------ -----------
-------- -------- -------- ------- ------- ------- ------ -----------
TOTAL RETURN (c):................................. 29.09% 4.89% 13.67% 2.39% 15.15% 12.29% 11.99% 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $497,461 $262,096 $119,829 $37,512 $22,605 $10,944 $4,408 $1,944
Average net assets (000).......................... $306,717 $246,609 $ 69,754 $29,875 $15,392 $ 7,103 $2,747 $1,047
Ratios to average net assets:
Expenses, including distribution fees........... 1.17% 1.20% 1.22% 1.23% 1.17% 1.29% 1.38% 1.29%(b)
Expenses, excluding distribution fees........... .92% .95% .97% 1.00% .97% 1.09% 1.18% 1.09%(b)
Net investment income........................... 2.84% 2.53% 2.90% 2.84% 3.88% 3.97% 4.44% 5.04%(b)
Portfolio turnover rate........................... 140% 97% 201% 108% 83% 105% 137% 106%
Average commission rate per share................. $ .0577 $ .0569 N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights for the year ended July 31, 1997, have been
audited by Price Waterhouse LLP, independent accountants, and for the five years
ended July 31, 1996, have been audited by Deloitte & Touche LLP, independent
auditors, whose reports thereon were 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 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. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
SEPTEMBER 15,
1987 (a)
YEAR ENDED JULY 31, THROUGH
---------------------------------------------------------------------------------------- JULY 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 (b)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period............... $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income..... .26 .21 .26 .24 .34 .35 .36 .45 .52 .32
Net realized and
unrealized gain (loss)
on investment
transactions............ 2.95 .28 1.10 (.05) 1.16 .82 .73 .18 .73 (.62)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
Total from investment
operations.............. 3.21 .49 1.36 .19 1.50 1.17 1.09 .63 1.25 (.30)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.27) (.20) (.25) (.28) (.29) (.36) (.37) (.52) (.47) (.25)
Distributions from net
realized gains on
investment and foreign
currency transactions... (.78) (.49) (.20) (.54) (.47) (.54) (.23) (.10) -- (.02)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
Total distributions....... (1.05) (.69) (.45) (.82) (.76) (.90) (.60) (.62) (.47) (.27)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
Net asset value, end of
period.................. $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
TOTAL RETURN (d):......... 28.24% 4.05% 12.79% 1.61% 14.27% 11.48% 11.13% 6.44% 13.73% (2.95)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $625,715 $420,465 $392,291 $445,609 $321,831 $225,995 $162,281 $154,917 $132,631 $149,472
Average net assets
(000)................... $431,425 $437,792 $409,419 $392,133 $267,340 $189,358 $149,907 $143,241 $139,009 $113,774
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.92% 1.95% 1.97% 2.00% 1.97% 2.09% 2.16% 2.07% 2.09% 2.08%(c)
Expenses, excluding
distribution fees...... .92% .95% .97% 1.00% .97% 1.09% 1.16% 1.08% 1.08% 1.11%(c)
Net investment income... 2.09% 1.78% 2.34% 2.08% 3.04% 3.25% 3.55% 4.42% 5.47% 4.22%(c)
Portfolio turnover rate... 140% 97% 201% 108% 83% 105% 137% 106% 137% 112%
Average commission rate
per share............... $ .0577 $ .0569 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- -----------------
(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) Annualized.
(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.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights for the year ended July 31, 1997, have been
audited by Price Waterhouse LLP, independent accountants, and for the year ended
July 31, 1996 and the period from August 1, 1994 through July 31, 1995, have
been audited by Deloitte & Touche LLP, independent auditors, whose reports
thereon were 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 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. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide-- Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
AUGUST 1,
YEAR ENDED JULY 31, 1994 (a)
----------------------------- THROUGH
1997 1996 JULY 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $11.80 $12.00 $11.12
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .26 .21 .21
Net realized and unrealized gain on investment
transactions.................................... 2.95 .28 1.12
------ ------ ------
Total from investment operations.................. 3.21 .49 1.33
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.27) (.20) (.25)
Distributions from net realized gains on
investment and foreign currency transactions.... (.78) (.49) (.20)
------ ------ ------
Total distributions............................... (1.05) (.69) (.45)
------ ------ ------
Net asset value, end of period.................... $13.96 $11.80 $12.00
------ ------ ------
------ ------ ------
TOTAL RETURN (c):................................. 28.24% 4.05% 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $7,023 $3,525 $3,046
Average net assets (000).......................... $4,790 $2,444 $ 920
Ratios to average net assets:
Expenses, including distribution fees........... 1.92% 1.95% 2.04%(b)
Expenses, excluding distribution fees........... .92% .95% 1.04%(b)
Net investment income........................... 2.09% 1.78% 2.20%(b)
Portfolio turnover rate........................... 140% 97% 201%
Average commission rate per share................. $.0577 $.0569 N/A
</TABLE>
- ---------------
(a) Commencement of offering of Class C 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights for the year ended July 31, 1997, have been
audited by Price Waterhouse LLP, independent accountants, and for the period
from March 1, 1996 through July 31, 1996, have been audited by Deloitte & Touche
LLP, independent auditors, whose reports thereon were 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 Z 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
-----------------------------
MARCH 1,
YEAR 1996 (a)
ENDED THROUGH
JULY 31, 1997 JULY 31, 1996
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.85 $12.16
------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .46 .13
Net realized and unrealized gain on investment
transactions.................................... 2.87 (.28)
------------- ------
Total from investment operations.................. 3.33 (.15)
------------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.39) (.16)
Distributions from net realized gains on
investment and foreign currency transactions.... (.78) --
------------- ------
Total distributions............................... (1.17) (.16)
------------- ------
Net asset value, end of period.................... $ 14.01 $11.85
------------- ------
------------- ------
TOTAL RETURN (b):................................. 29.39% (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $129,459 $4,015
Average net assets (000).......................... $ 99,391 $4,217
Ratios to average net assets:
Expenses, including distribution fees........... .92% .95%(c)
Expenses, excluding distribution fees........... .92% .95%(c)
Net investment income........................... 3.12% 2.72%(c)
Portfolio turnover rate........................... 140% 97%
Average commission rate per share................. $ .0577 $.0569
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
(b) 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 the period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS TO ACHIEVE A HIGH TOTAL INVESTMENT
RETURN CONSISTENT WITH MODERATE RISK. THERE CAN BE NO ASSURANCE THAT THIS
OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in the
Statement of Additional Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF THE FUND THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE FUND PURSUES ITS OBJECTIVE THROUGH THE INVESTMENT POLICIES DESCRIBED
BELOW. THE FUND 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 FUND WILL BE
SUBJECT TO MODERATE RISK, IN THE OPINION OF THE FUND'S INVESTMENT ADVISER. AS
WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN DECREASE
IN VALUE AND YOU CAN LOSE MONEY. The following table summarizes the types of
investments in which the Fund may invest under normal circumstances in seeking
to achieve its objective:
<TABLE>
<CAPTION>
EQUITY SECURITIES
- --------------------------
<S> <C>
Type of issuer Common stock and common stock equivalents of major, established
companies AND smaller, faster growing companies
<CAPTION>
DEBT SECURITIES
- --------------------------
<S> <C>
Quality Investment grade debt securities AND up to 25% of its assets in
debt securities rated below investment grade
Percent of Fund's assets At least 25% of its assets in fixed-income senior securities
Average duration 10 years or less; weighted average maturity will exceed the
average duration
</TABLE>
The Fund's investment adviser determines the allocation of assets among the
different investment vehicles available (asset mix) to the Fund 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 the Fund 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 risk objective of the Fund in making asset mix determinations.
Equity securities of smaller companies are generally subject to a greater
degree of risk and price volatility than those of major companies. 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. A more complete
description of the Fund's investment policies is set forth below.
9
<PAGE>
THE FUND WILL INVEST IN A DIVERSIFIED PORTFOLIO COMPRISED GENERALLY OF EQUITY
SECURITIES, DEBT OBLIGATIONS AND MONEY MARKET INSTRUMENTS. The specific asset
mix of the Fund will be determined by the Fund's investment adviser. Under
normal circumstances, the Fund will maintain at least 25% of the value of its
assets in fixed-income securities. There is no other limitation on the
percentage of assets invested in the various investment categories (money market
instruments, debt obligations and equity securities).
EQUITY SECURITIES. THE EQUITY SECURITIES IN WHICH THE FUND 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 Fund may also invest in preferred
stocks or debt securities that either have warrants attached or are otherwise
convertible into such common stocks. Equity securities include common stocks,
preferred stocks, securities convertible or exchangeable for common or preferred
stocks, equity investments in partnerships, joint ventures and other forms of
non-corporate investments, American Depositary Receipts, and warrants, options,
and rights exercisable for equity securities. See "Convertible Securities"
below. In addition, the Fund may invest in common stocks and common stock
equivalents of smaller, faster growing companies.
IN PURSUIT OF ITS INVESTMENT OBJECTIVE, THE FUND 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. THE FUND 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.
DEBT OBLIGATIONS. IN ADDITION TO MONEY MARKET INSTRUMENTS DESCRIBED ABOVE, THE
FUND MAY INVEST IN LONGER-TERM DEBT SECURITIES. It is anticipated that the
average duration of the debt securities held by the Fund 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
10
<PAGE>
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 Fund.
Debt securities acquired by the Fund will generally be rated at the time of
purchase within the four highest categories determined by Standard & Poor's
Ratings Group (S&P), Moody's Investors Service, Inc. (Moody's) or comparably
rated by another nationally recognized statistical rating organization (NRSRO),
or, if not rated, be of comparable quality in the opinion of the investment
adviser. However, the Fund may invest up to 25% of its total assets in
securities rated at the time of purchase BB or Ba or lower by S&P or Moody's,
respectively (or comparably rated by another NRSRO), or, if not rated, of
comparable quality in the opinion of the investment adviser, all of which are
commonly known as "junk bonds." See "Risks of Investing in High Yield
Securities" below.
THE FUND 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 Fund 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 if the agency
or instrumentality does not meet its commitments.
THE FUND 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 Fund's shares. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to predict accurately the average life or realized yield of a particular issue
of pass-through certificates. Mortgage-backed securities are often subject to
more rapid repayment than their stated maturity date would indicate as a result
of the pass-through of prepayments of principal on the underlying mortgage
obligations. While the timing of prepayments of graduated payment mortgages
differs somewhat from that of conventional mortgages, the prepayment experience
of graduated payment mortgages is basically the same as that of the conventional
mortgages of the same maturity dates over the life of the pool. During periods
of declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Fund reinvests the prepaid amounts in securities the yields of
which reflect interest rates prevailing at the time. Therefore, the Fund'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 FUND 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 Fund
may invest in these and other types of asset-backed securities that may be
developed in the future. Asset-
11
<PAGE>
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.
MONEY MARKET INSTRUMENTS. The Fund may invest in the following money market
instruments generally maturing in 13 months 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 Fund of such
obligations, total assets of not less than $1 billion or its equivalent. The
Fund 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,
funding agreements and other obligations issued by a U.S. company, a foreign
company or a foreign government, its agencies, instrumentalities or
political subdivisions, maturing in 13 months or less, denominated in U.S.
dollars, and, at the date of investment, rated at least A or A-2 by S&P or A
or Prime-2 by Moody's, or comparably rated by another NRSRO 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, or comparably rated by
another NRSRO. If such obligations are guaranteed or supported by a letter
of credit issued by a bank, the bank (including a foreign bank) must meet
the requirements set forth in paragraph (2) above. If such obligations are
guaranteed or insured by an insurance company or other non-bank entity, the
insurance company or other non-bank entity must represent a credit of high
quality, as determined by the Fund's investment adviser under the
supervision of the Fund's Trustees.
FOREIGN SECURITIES. THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN
FOREIGN EQUITY AND DEBT SECURITIES AND MONEY MARKET INSTRUMENTS. For purposes of
this limitation, American Depositary Receipts, Yankee bonds (I.E., U.S. dollar
denominated bonds issued by foreign companies in the United States) and global
bonds which are U.S. dollar denominated are not deemed to be foreign securities.
In many instances, foreign securities may provide higher yields but may be
subject to greater fluctuations in price than securities of domestic issuers
which have similar maturities or quality.
INVESTING IN SECURITIES OF FOREIGN COMPANIES AND COUNTRIES INVOLVES CERTAIN
CONSIDERATIONS AND RISKS WHICH ARE NOT TYPICALLY ASSOCIATED WITH INVESTING IN
U.S. GOVERNMENT SECURITIES AND SECURITIES OF DOMESTIC COMPANIES. There may be
less publicly available information about a foreign issuer than a domestic one,
and foreign companies are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than exists in the
United States. Interest and dividends paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on such
investments as compared to dividends and interest paid to the Fund 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 Fund held in foreign countries. Finally, the
establishment of exchange controls or other foreign governmental laws or
restrictions could adversely affect the payment of obligations.
12
<PAGE>
To the extent the Fund's currency exchange transactions do not fully protect
the Fund against adverse changes in currency exchange rates, decreases in the
value of currencies of the foreign countries in which the Fund will invest
relative to the U.S. dollar will result in a corresponding decrease in the U.S.
dollar value of the Fund'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 the Fund invests relative to the
U.S. dollar will result in a corresponding increase in the U.S. dollar value of
the Fund'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.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
requirements of the Internal Revenue Code of 1986, as amended (Internal Revenue
Code). To qualify, a REIT must distribute at least 95% of its taxable income to
its shareholders and receive at least 75% of that income from rents, mortgages
and sales of property. REITs offer investors greater liquidity and
diversification than direct ownership of a handful of properties, as well as
greater income potential than an investment in common stocks. Like any
investment in real estate, though, a REIT's performance depends on several
factors, such as its ability to find tenants for its properties, to renew leases
and to finance property purchases and renovations.
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 Fund. See "Investment Objective and
Policies--Risk Factors Relating to High Yield Securities" in the Statement of
Additional Information.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND 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. THE FUND,
AND THUS INVESTORS, MAY LOSE
13
<PAGE>
MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. The Fund's ability to
use these strategies may be limited by market conditions, regulatory limits and
tax considerations and there can be no assurance that any of these strategies
will succeed. See "Investment Objective and Policies" in the Statement of
Additional Information. New financial products and risk management techniques
continue to be developed, and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND 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 ITS PORTFOLIO. These
options will be on equity securities, financial indices (E.G., S&P 500) and
foreign currencies. The Fund 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. The Fund may also
purchase put and call options to offset previously written put and call options
of the same series. See "Investment Objective 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 the Fund writes a call option, the Fund
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. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if, as
long as the Fund is obligated under the option (i) it owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash or other liquid assets in an amount equal to or greater than its obligation
under the option. There is no limitation on the amount of call options the Fund
may write. See "Investment Objective and Policies--Options on Stock Indices" in
the Statement of Additional Information.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND 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. The Fund may enter into such contracts on a spot, I.E., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.
THE FUND'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 Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest or dividends receivable and
Fund 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
the Fund may enter into, the Fund may not
14
<PAGE>
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 foreign
currency) of the securities held in the Fund denominated or quoted in, or
currently convertible into, such currency.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN HEDGING
OR RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THE FUND, AND THUS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
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.
THE FUND 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 FUND'S FUTURES POSITIONS AND
PREMIUMS PAID FOR OPTIONS THEREON WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF
THE FUND'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 FUND.
THE FUND'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 Fund. 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 the Fund's ability to purchase
or sell certain futures contracts or options thereon on any particular day.
THE FUND'S ABILITY TO ENTER INTO AND CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL 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 Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that the skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of the Fund 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 Fund to sell a
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portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with hedging
transactions. See "Investment Objective and Policies" and "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund 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 Fund 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 Fund 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, equity securities or other liquid, unencumbered assets,
marked-to-market daily, having a value equal to or greater than the Fund's
purchase commitments. 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 Fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Fund's net asset
value.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund 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, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, 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 the Fund's net assets (determined at the
time of the short sale) may be subject to such sales.
INTEREST RATE SWAPS
The Fund 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 the Fund intends to acquire. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest (E.G., an exchange of floating-rate
payments for fixed-rate payments). The Fund 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 Fund uses its interest rate swaps
for hedging purposes and not as a speculative investment.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Fund 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 Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by Prudential Investments Fund
Management LLC pursuant to an order of the Securities and Exchange Commission
(SEC).
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BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (computed at the time the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings. If the
Fund borrows to invest in securities, any investment gains made on the
securities in exess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities purchased
fails to cover their cost (including any interest paid on the money borrowed) to
the Fund, the net asset value of the Fund's shares will decrease faster than
would otherwise be the case. This is the speculative factor known as "leverage."
See "Investment Restrictions" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. See "Investment Restrictions" in the Statement
of Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund 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 the Fund'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 Fund. 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
The Fund 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 Fund's
outstanding voting securities, as defined in the Investment Company Act. See
"Investment Restrictions" in the Statement of Additional Information.
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<PAGE>
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, 1997, total expenses as a percentage of
average net assets were 1.17%, 1.92%, 1.92% and .92% of the Class A, Class B,
Class C and Class Z shares, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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 THE FUND. PIFM is organized in New York as a
limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended July 31, 1997, the Fund paid management fees to PIFM of
.65 of 1% of the Fund's average net assets. See "Manager" in the Statement of
Additional Information.
As of August 31, 1997, PIFM served as the manager to 61 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $58.7 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM 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 PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The Fund is managed by Gregory Goldberg, Jeffrey Rose, CFA and Barbara
Kenworthy. Messrs. Goldberg and Rose have had responsibility for the day-to-day
management of the equity portion of the Fund since January 1995 and July 1997,
respectively. Mr. Goldberg is a Managing Director of Prudential Investments. He
joined PIC on January 11, 1994. Mr. Goldberg was previously employed by Daiwa
International Capital Management (January 1988-December 1993) as a portfolio
manager for institutional clients. Mr. Goldberg is also a portfolio manager of
Prudential Multi-Sector Fund, Inc. Mr. Rose is a Vice President and Portfolio
Manager of Prudential Investments. He joined Prudential Investments in June 1994
as an equity analyst. Prior thereto, he co-managed a portfolio of private debt
and equity securities for Prudential Capital Group (May 1992-June 1994). He also
serves as a portfolio manager of Gibralter Advisors' Growth Portfolio. Ms.
Kenworthy, a Managing Director of Prudential Investments, has had responsibility
for the day-to-day management of the bond portion of the Fund since
1997. She also serves as a portfolio manager of Prudential Diversified
Bond Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust (Short-Intermediate Term Series) and Prudential Mortgage Income
Fund, Inc. and has over 20 years of investment management experience in both
U.S. and foreign securities and investment grade and high yield bonds.
In making equity investments, Messrs. Goldberg and Rose generally focus on
growth stocks with a potential for capital appreciation. They evaluate a
company's earnings and balance sheet to find companies that, in their view, are
leaders in their fields and have growth potential. With respect to fixed-income
securities, Ms. Kenworthy generally focuses on issues with a potential for total
return, selecting securities that, in her opinion, compare favorably in terms of
price and yield relative to maturity.
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<PAGE>
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), 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, CLASS B, CLASS C AND CLASS Z 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 A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. Prudential
Securities also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of which is reimbursed by or paid for by
the Fund. 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.
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 PRUDENTIAL SECURITIES 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 THE
FUND. 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. Prudential Securities
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, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES OF THE FUND. The Class B and Class C Plans provide
for the payment to Prudential Securities of (i) an asset-based sales charge of
.75 of 1% of the average daily net assets of each of the Class B and Class C
shares and (ii) a service fee of .25 of 1% of the average daily net assets of
each of the Class B and Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended July 31, 1997, the Fund paid distribution expenses
of .25%, 1.00% and 1.00% of the average daily net assets of the Class A, Class B
and Class C shares, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income. See "Distributor"
in the Statement of Additional Information.
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<PAGE>
Distribution expenses attributable to the sale of Class A, Class B or Class C
shares of the Fund will be allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares of
the Fund 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 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 Fund. The Fund 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 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 (including Prudential Securities)
and other persons who distribute shares of the Fund (including Class Z shares).
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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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 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 (800) 225-1852.
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.
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<PAGE>
FEE WAIVERS
PSI has agreed to limit its distribution fees for the Class A shares as
described under "Distributor" above. Fee waivers will increase total return. See
"Performance Information" in the Statement of Additional Information and "Fund
Expenses."
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 LLC (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 PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'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 THE FUND 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. For valuation purposes, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund 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 Fund or days on which changes in the
value of the portfolio securities do not materially affect the NAV.
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. The
NAV of Class Z shares will generallly be higher than the NAV of the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
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<PAGE>
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z 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 Fund would have increased (decreased) over a specified period
of time (I.E., one, five or ten years or since inception of the Fund) assuming
that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The aggregate
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same aggregate total return if performance had been
constant over the entire period. Average annual total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither average annual total return nor
aggregate total return takes into account any federal or state income taxes
which may be payable upon redemption. The yield refers to the income generated
by an investment in the Fund 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. 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. 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
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND NET
CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes,
Dividends and Distributions" 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 the Fund 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, Dividends and Distributions" in the Statement of Additional Information.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which own mostly passive
assets or derive 75% or more of their income from passive sources. For tax
purposes, the Fund's investments in PFICs may subject the Fund to federal income
taxes on certain income and gains realized by the Fund. Certain gains or losses
from fluctuations in foreign currency exchange rates (Section 988 gains or
losses) will affect the amount of ordinary income the Fund will be able to pay
as dividends. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
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<PAGE>
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 for securities held between 12 and 18 months
currently is 28%, and for securities held more than 18 months is 20%.
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 the Fund will be treated as
received by shareholders on December 31 of the year the dividends are declared.
This rule applies to dividends declared by the Fund 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 the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign dividends, interest income, capital gain net income,
gain or loss from Section 1256 contracts and income from some other sources will
not be eligible for the corporate dividends received deduction. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
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, will be treated as
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. Gain or loss on shares held more than 18 months will be
considered in determining a holder's adjusted net capital gain subject to a
maximum tax rate of 20%.
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 any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
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 certain shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. 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 U.S. withholding tax
at the rate of 30% (or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
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
23
<PAGE>
same amount except that each class (other than Class Z) will bear its own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends for
Class A shares in relation to Class Z 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 LLC,
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.
IF YOU BUY SHARES ON OR PRIOR TO THE RECORD DATE (THE DATE THAT DETERMINES WHO
RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY YOU INVESTED AS
A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF DIVIDENDS WHEN
BUYING SHARES OF THE FUND.
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 THE BALANCED PORTFOLIO OF
PRUDENTIAL ALLOCATION FUND. THE FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER
OF SHARES OF SEPARATE SERIES OR PORTFOLIOS, DIVIDED INTO FOUR CLASSES,
DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. Each class of shares
represents an interest in the same assets of the Fund 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 charges and distribution and/or service fees), which may
affect performance, (ii) each class has exclusive voting rights or 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 a
limited group of investors. See "How the Fund is Managed--Distributor." 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 (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, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share 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 and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election of
Trustees.
24
<PAGE>
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
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 LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS
SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT CLASS Z SHARES. The purchase price is
the NAV next determined following receipt of an order in proper form 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). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
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.
25
<PAGE>
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 third 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 Balanced Fund, specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares).
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.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Balanced Fund,
Class A, Class B, Class C or Class Z 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 FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
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% .30 of 1% (Currently being charged Initial sales charge waived or
of the public offering price at a rate of .25 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another
the amount invested or the class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (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, and (iii)
only Class B shares have a conversion feature. The four 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 (if any) 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 and Class Z shares.
26
<PAGE>
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z 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 Fund:
If you intend to hold your investment in the Fund 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 when 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
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" 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>
27
<PAGE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
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 (collectively, Benefit Plans), provided that the Benefit 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 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.
PRUDENTIAL RETIREMENT PROGRAMS. 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, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing assets" as
used herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or Smart Path Program (Participating Funds). "Existing assets" also
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the individual employer's
qualified plan(s) or non-qualified plans so long as the employers in the
Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Individual Retirement Accounts and
28
<PAGE>
Savings Accumulation Plans of the company's employees. The Program is available
only to (i) employees who open an IRA or Savings Accumulation Plan account with
the Transfer Agent and (ii) spouses of employees who open an IRA account with
the Transfer Agent. The program is offered to companies that have at least 250
eligible employees.
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 of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM 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 of subadvisers of the
Prudential Mutual Funds provided that such purchases at NAV are permitted by
such person's employer, (d) Prudential, 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, (e) 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, (f) 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 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 and (g)
investors in Individual Retirement Accounts, provided the purchase is made with
the proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential Investments serves as the recordkeeper or administrator.
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.
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." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Section 457 and 403(b)(7) of the Internal Revenue Code and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
29
<PAGE>
sponsored by the same employer or group of related employers) have at least $50
million in defined contribution assets; (ii) participants in any fee-based
program or trust program sponsored by Prudential Securities, The Prudential
Savings Bank, F.S.B. (or any affiliate) which includes mutual funds as
investment options and for which the Fund is an available option; (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by Prudential for whom Class Z shares of the Prudential Mutual Funds are an
available investment option; (iv) Benefit Plans for which Prudential Retirement
Services serves as recordkeeper and as of September 20, 1996, (a) were Class Z
shareholders of the Prudential Mutual Funds or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds; (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund);
and (vi) employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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 LLC, 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. In the case of redemptions
from a PruArray or SmartPath Plan, if the proceeds of the redemption are
invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
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
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<PAGE>
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 CASHIER'S 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 the Fund, 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. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege will generally not affect the federal tax treatment of
any gain realized upon redemption. However, if the redemption was made within a
30 day period of the repurchase and if the redemption resulted in a loss, some
or all of the loss, depending on the amount reinvested, may not be allowed for
federal income tax purposes. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
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
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<PAGE>
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" below.
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First.............. 5.0%
Second............. 4.0%
Third.............. 3.0%
Fourth............. 2.0%
Fifth.............. 1.0%
Sixth.............. 1.0%
Seventh............ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include (i) in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii) in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI
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<PAGE>
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.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
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.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
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.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
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<PAGE>
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, Class C and Class Z
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 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 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, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR
CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF 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, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
34
<PAGE>
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 LLC, 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 LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. 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) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" 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 for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. 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.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares is an available option and 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 Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading ("Market Timers").
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
35
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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.
36
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC.
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 the best 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 the 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. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Prime-1: Issuers rated "Prime-1" (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
Prime-2: Issuers rated "Prime-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 in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC and C is regarded 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: This highest category 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 this designation 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 Investments 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 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
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
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Global Genesis Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Distressed Securities Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value 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, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
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
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<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Fund's Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objectives and Policies............ 9
Hedging and Return Enhancement Strategies..... 13
Other Investments and Policies................ 16
Investment Restrictions....................... 17
HOW THE FUND IS MANAGED......................... 18
Manager....................................... 18
Distributor................................... 19
Fee Waivers................................... 21
Portfolio Transactions........................ 21
Custodian and Transfer and Dividend Disbursing
Agent........................................ 21
HOW THE FUND VALUES ITS SHARES.................. 21
HOW THE FUND CALCULATES PERFORMANCE............. 22
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 22
GENERAL INFORMATION............................. 24
Description of Shares......................... 24
Additional Information........................ 25
SHAREHOLDER GUIDE............................... 25
How to Buy Shares of the Fund................. 25
Alternative Purchase Plan..................... 26
How to Sell Your Shares....................... 30
Conversion Feature--Class B Shares............ 33
How to Exchange Your Shares................... 34
Shareholder Services.......................... 36
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
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MF134A 44414OE
Class A: 74431M-10-5
Class B: 74431M-20-4
CUSIP Nos.: Class C: 74431M-30-3
Class Z: 74431M-40-2
PROSPECTUS
___, 1997
PRUDENTIAL
BALANCED
FUND
(formerly Prudential
Allocation Fund)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL BALANCED FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED , 1997
Prudential Balanced Fund (the Fund) is an open-end, diversified, management
investment company. The investment objective of the Fund is to achieve a high
total investment return consistent with moderate risk. The Fund 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. There can be no assurance that the
Fund's investment objective will be achieved. See "Investment Objective and
Policies."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 , 1997, 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 24
Investment Objective and Policies........................ B-2 9
Investment Restrictions.................................. B-11 17
Trustees and Officers.................................... B-12 18
Manager.................................................. B-16 18
Distributor.............................................. B-18 19
Portfolio Transactions and Brokerage..................... B-21 21
Purchase and Redemption of Fund Shares................... B-22 25
Shareholder Investment Account........................... B-26 36
Net Asset Value.......................................... B-29 21
Taxes, Dividends and Distributions....................... B-30 22
Performance Information.................................. B-32 22
Organization and Capitalization.......................... B-33 24
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................. B-34 21
Financial Statements..................................... B-35 --
Report of Independent Accountants........................ B-50 --
Independent Auditors' Report............................. B-51 --
Appendix I--Historical Performance Data.................. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Information Relating to Prudential......... III-1 --
- --------------------------------------------------------------------------------
MF134B 444141C
<PAGE>
GENERAL INFORMATION
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. On July 18, 1997, shareholders of the
Strategy Portfolio approved a proposal to exchange the assets and liabilities of
the Strategy Portfolio for shares of the Balanced Portfolio of the Fund. On July
25, 1997, shareholders of the Strategy Portfolio became shareholders of the
Balanced Portfolio. The Strategy Portfolio was terminated effective with the
closing of the reorganization. Effective July 25, 1997, Prudential Allocation
Fund (Balanced Portfolio) changed its name to Prudential Balanced Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to achieve a high total investment
return consistent with moderate risk. The Fund 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
Fund's investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies" in the Prospectus.
RISKS OF TRANSACTIONS IN OPTIONS
The Fund 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. The Fund 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 the Fund 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 Fund 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 the Fund as a covered call option writer is unable
to effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an 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
B-2
<PAGE>
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, the Fund 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 the Fund
writes a call option on a broadly-based stock market index, the Fund 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. The Fund 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 the Fund 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 Fund'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, the Fund will
segregate, escrow or pledge an amount in cash, U.S. Government obligations,
equity securities or other liquid, unencumbered assets, marked-to-market daily,
equal in value to the difference. In addition, when the Fund writes a call on an
index which is in-the-money at the time the call is written, the Fund will
segregate with the Fund's Custodian or pledge to the broker as collateral cash
or other liquid assets 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 Fund'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 Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if the Fund 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 Fund in cash or other liquid assets 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
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, successful use by the
Fund of options on indices would be subject to the investment adviser's ability
to predict correctly movements in the direction of the stock market generally or
of a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Index prices may be distorted if trading of certain securities included in
the index is interrupted. Trading in 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 Fund 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 Fund. It is the Fund'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.
B-3
<PAGE>
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. The Fund will not
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 the Fund has other liquid
assets which are sufficient to satisfy the exercise of a call, the Fund 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 Fund fails to anticipate an exercise, it may have to borrow
from a bank (in amounts not exceeding 20% of the Fund's total assets) pending
settlement of the sale of securities in its portfolio and would incur interest
charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund 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 Fund is able to sell securities in its portfolio. As with stock
options, the Fund 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 Fund
would be able to deliver the underlying securities in settlement, the Fund 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 Fund has written is "covered" by an index call held by the Fund with
the same strike price, the Fund 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
Fund exercises the call it holds or the time the Fund 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
Objective 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
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Fund 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 Fund will be able to protect itself
against a possible loss resulting from an adverse change 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 Fund 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. The Fund does not intend to enter into
such forward contracts to protect the value of its portfolio securities on a
regular or continuous
B-4
<PAGE>
basis. The Fund 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 Fund 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 Manager and Subadviser believe
that it is important to have the flexibility to enter into such forward
contracts when they determine that the best interests of the Fund will thereby
be served. If the Fund enters into a position hedging transaction, the
transaction will be "covered" by the position being hedged or the Fund's
Custodian or sub-custodian will place cash or other liquid assets into a
segregated account of the Fund (less the value of the "covering" positions, if
any) in an amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract. The assets placed in the segregated
account will be marked-to-market daily, and if the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account so that the value of the account will, at all times, equal
the amount of the Fund's net commitment with respect to such contract. The
Fund's ability to enter into forward foreign currency exchange contracts may be
limited by certain requirements for qualification as a regulated investment
company under the Internal Revenue Code. See "Taxes, Dividends and
Distributions."
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund 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 Fund 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 Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund 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 Fund'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 Fund 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 Fund 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.
The Fund's dealings in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Fund 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 the Fund 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
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
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 the Fund 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
B-5
<PAGE>
any particular time. Accordingly, there can be no assurance that it will be
possible, at any particular time, to close a futures position. If the Fund could
not close a futures position and the value of such position declined, the Fund
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 Fund's purchasing and selling futures contracts and options thereon for BONA
FIDE hedging transactions, except that 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 Fund's total assets. In addition, a Fund 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 Fund's total assets. The Fund will use futures and
options thereon in a manner consistent with these requirements.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account maintained at the Custodian,
cash or other liquid assets 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 Fund to purchase the same contract at a price no higher than the
price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash or other liquid assets 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 Fund by the Fund's Custodian.
Alternatively, the Fund 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 Fund.
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 Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may be
disadvantageous to do so. In addition, the Fund 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 the Fund's ability to effectively
hedge its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund 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 Fund 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 the Fund'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 Fund'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 Fund seeks a 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 the Fund 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
B-6
<PAGE>
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 the Fund 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 the Fund 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 Fund 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 the Fund 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. The Fund 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 the Fund 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
POSITION LIMITS. Transactions by the Fund 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 Fund 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 Fund.
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
B-7
<PAGE>
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 the Fund'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 the Fund'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, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund 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 Fund and increasing the exposure
of the Fund to the risks of high yield securities.
MORTGAGE-RELATED SECURITIES
The Fund 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.
The Fund may also invest in Real Estate Mortgage Investment Conduits
(REMICs). An issuer of REMICs may be a trust, partnership, corporation,
association, segregated pool of mortgages, or agency of the U.S. Government and,
in each case, must qualify and elect treatment as such under the Tax Reform Act
of 1986. A REMIC must consist of one or more classes of "regular interests" some
of which may be adjustable rate, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be directly
or indirectly secured, principally by real property. The Fund does not intend to
invest in residual interests. REMICs are intended by the U.S. Congress
ultimately to become the exclusive vehicle for the issuance of multi-class
securities backed by real estate mortgages. As of January 1, 1992, if a trust or
partnership that issues CMOs does not elect or qualify for REMIC status, it is
taxed at the entity level as a corporation.
Certain issuers of CMOs, including CMOs that have elected to be treated as
REMICs, are not considered investment companies pursuant to a Rule adopted by
the Securities and Exchange Commission (SEC), and the Fund may invest in the
securities of such issuers without the limitations imposed by the Investment
Company Act on investments by an investment company in other investment
companies. In addition, in reliance on an earlier SEC interpretation, the Fund'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 the Fund
selects CMOs or REMICs that do not meet the above requirements, the Fund 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.
INTEREST RATE SWAPS
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 the Fund 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 the Fund is contractually
obligated to make. If the other party to an interest rate swap defaults, the
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<PAGE>
Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. Since interest rate swaps are
individually negotiated, the Fund 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.
MONEY MARKET INSTRUMENTS
The Fund 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. The Fund 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 Fund'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.
The Fund 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 the Fund do not exceed 10% of the
Fund'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 Investments Fund Management LLC (PIFM) 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, the Fund 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
Fund's total assets and provided further that such loans are callable at any
time by the Fund and are at all times secured by cash or equivalent collateral
(including a letter of credit) that is equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund 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
the Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates and the Fund can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to be
creditworthy pursuant to procedures approved by the Trustees of the Fund. On
termination of the loan, the borrower is required to return the securities to
the Fund, and any gain or loss in the market price during the loan would inure
to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund 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 Fund's investment in the securities
which are the subject of the loan. The Fund 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.
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<PAGE>
WARRANTS
The Fund 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 the Fund in units or attached to
other securities will be deemed to be without value.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will consider,
INTER ALIA, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to puchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). In addition, in order
for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (i) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser, and (ii) it must not be "traded flat" (I.E., without accrued interest)
or in default as to principal or interest. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
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 the Fund and the counterparty have provided for the
Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
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<PAGE>
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 5% of its total assets in securities of other
registered investment companies. The Fund does not intend to invest in such
securities during the coming year. If the Fund does invest in securities of
other registered investment companies, shareholders of the Fund may be subject
to duplicate management and advisory fees.
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's Custodian. "Liquid assets" mean cash, U.S. Government
securities, equity securities (including foreign securities), debt obligations
or other liquid, unencumbered assets, marked-to-market daily.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 200%. The portfolio turnover rates for
the Fund for the fiscal years ended July 31, 1996 and 1997 were 97% and 140%,
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
the Fund. 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, Dividends and Distributions."
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 the Fund. A "majority of the
outstanding voting securities" of the Fund, 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.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund 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 Fund 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 Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction, 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 Fund's assets, more than 5% of the total assets of the Fund (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 Fund (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 Fund would then hold more than
10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Fund 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 Fund 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 Fund's total assets).
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund'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 Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (72) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; previously Vice Chairman of Broyhill
Furniture Industries, Inc.; Certified Public Accountant;
Secretary and Treasurer of Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of Mars Hill College;
Director of The High Yield Income Fund, Inc.
Delayne Dedrick Gold (58) Trustee Marketing and Management Consultant; Director of The High
Yield Income Fund, Inc.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
*Robert F. Gunia (50) Trustee Comptroller (since May 1996) of Prudential Investments;
Executive Vice President and Treasurer (since December 1996),
Prudential Investments Fund Management LLC (PIFM); Senior
Vice President (since March 1987) of Prudential Securities
Incorporated (Prudential Securities); formerly Chief
Adminstrative Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-September
1996) of Prudential Mutual Fund Management, Inc.; Vice
President and Director of The Asia Pacific Fund, Inc. (since
May 1989); Director of The High Yield Income Fund, Inc.
Donald D. Lennox (78) Trustee Chairman (since February 1990) and Director (since April 1989)
of International Imaging Materials, Inc. (thermal transfer
ribbon manufacturer); Retired Chairman, Chief Executive
Officer and Director of Schlegel Corporation (industrial
manufacturing) (March 1987-February 1989); Director of
Gleason Corporation, Personal Sound Technologies, Inc. and
The High Yield Income Fund, Inc.
Douglas H. McCorkindale (58) Trustee President (since September 1997) and Vice Chairman (since
March 1984); Gannett Co. Inc. (publishing and media),
Director of Continental Airlines, Inc., Gannett Co. Inc. and
Frontier Corporation.
*Mendel A. Melzer, CFA (35) Trustee Chief Investment Officer (since October 1996) of Prudential
751 Broad St. Mutual Funds; formerly Chief Financial Officer (November
Newark, NJ 07102 1995-September 1996) of Prudential Investments, Senior Vice
President and Chief Financial Officer (April 1993-November
1995) of Prudential Preferred Financial Services, Managing
Director (April 1991-April 1993) of Prudential Investment
Advisors and Senior Vice President (July 1989-April 1991) of
Prudential Capital Corporation; Chairman and Director of
Prudential Series Fund, Inc.; Director of The High Yield
Income Fund, Inc.
Thomas T. Mooney (55) Trustee President of the Greater Rochester Metro Chamber of Commerce;
formerly Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, The Business Council of New York State, Monroe
County Water Authority, Rochester Jobs, Inc., Executive
Service Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast-Midwest Institute, First
Financial Fund, Inc., The High Yield Income Fund, Inc. and
The High Yield Plus Fund, Inc.
Stephen P. Munn (54) Trustee Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988-December 1993) of
Carlisle Companies Incorporated (manufacturer of industrial
products).
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker (53) President and Trustee Employee of Prudential Investments; formerly President, Chief
751 Broad St. Executive Officer and Director (October 1993-September 1996),
Newark, NJ 07102 Prudential Mutual Fund Management, Inc., Executive Vice
President, Director and Member of Operating Committee
(October 1993-September 1996), Prudential Securities,
Director (October 1993-September 1996) of Prudential
Securities Group, Inc., Executive Vice President (January
1994-September 1996), The Prudential Investment Corporation,
Director (January 1994-September 1996), Prudential Mutual
Fund Distributors, Inc. (PMFD) and Prudential Mutual Fund
Services, Inc. (PMFS) and Senior Executive Vice President and
Director of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director of The High
Yield Income Fund, Inc.
Robin B. Smith (57) Trustee Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1989-August 1996) and President
and Chief Operating Officer (September 1981-December 1988) of
Publishers Clearing House; Director of BellSouth Corporation,
Texaco Inc., Spring Industries Inc. and Kmart Corporation.
Louis A. Weil, III (55) Trustee Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers Inc.;
Chairman of the Board (since January 1996), Publisher and
Chief Executive Officer (August 1991-December 1995), Phoenix
Newspapers, Inc.; formerly Publisher of Time Magazine (May
1989-March 1991), President, Publisher and CEO of The Detroit
News (February 1986-August 1989) and member of the Advisory
Board, Chase Manhattan Bank-- Westchester; Director of The
High Yield Income Fund, Inc.
Clay T. Whitehead (58) Trustee President of National Exchange Inc. (new business development
firm) (since May 1983).
S. Jane Rose (51) Secretary Senior Vice President (since December 1996), PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since
July 1992); formerly Senior Vice President (January
1991-September 1996) and Senior Counsel (June 1987-September
1996) of Prudential Mutual Fund Management, Inc. and Vice
President and Associate General Counsel of Prudential
Securities.
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997),
Prudential Mutual Funds & Annuities; Executive Vice
President, Secretary and General Counsel (since December
1996) of PIFM; formerly Vice President and General Counsel
(March 1994-March 1997) of Prudential Retirement Services and
Associate General Counsel and Chief Financial Services
Officer (1988-1994), Frank Russell Company.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS (AGE)(1) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Grace C. Torres (38) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and President (since March 1994) of Prudential Securities;
Accounting Officer formerly First Vice President (March 1994-September 1996),
Prudential Mutual Fund Management, Inc. and Vice President
(July 1989-March 1994) of Bankers Trust Corporation.
Stephen M. Ungerman (43) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments and
the Private Asset Group of The Prudential Insurance Company
of America (Prudential); formerly First Vice President of
Prudential Mutual Fund Management, Inc. (February
1993-September 1996); prior thereto, Senior Tax Manager of
Price Waterhouse LLP (1981-January 1993).
Marguerite E. H. Morrison (41) Assistant Secretary Vice President (since December 1996) of PIFM; Vice President
and Associate General Counsel (since September 1987) of
Prudential Securities; formerly Vice President and Associate
General Counsel (June 1991-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
- ------------------------
(1) Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, Newark, New Jersey 07102-4077.
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities, Prudential or PIFM.
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.
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.
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 Fund pays each of its Trustees who is not an affiliated person of
PIFM annual compensation of $4,000 in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Trustee may change as a
result of the introduction of additional funds upon which the Trustee will be
asked to serve.
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.
B-15
<PAGE>
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, 1997 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 PIFM (Fund Complex) for the calendar year ended December 31, 1996. In
October 1996, shareholders elected a new Board of Trustees. Below are listed the
Trustees who have served the Fund during its most recent fiscal year, as well as
the new Trustees who took office after the shareholders' meeting in October.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM FUND
AGGREGATE BENEFITS ACCRUED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO TRUSTEES
- ----------------------------------- ------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Edward D. Beach--Trustee $ 2,771 None N/A $166,000 (21/39)*
Delayne Dedrick Gold--Trustee 1,000 None N/A $175,308 (21/42)*
Robert F. Gunia--Trustee+ -- None N/A --
Donald D. Lennox--Trustee 2,771 None N/A $90,000 (10/22)*
Douglas H. McCorkindale--Trustee** 2,771 None N/A $71,208 (10/13)*
Mendel A. Melzer--Trustee+ -- None N/A --
Thomas T. Mooney--Trustee** 2,771 None N/A $135,375 (18/36)*
Stephen P. Munn--Trustee 1,000 None N/A $49,125 (6/8)*
Richard A. Redeker--Trustee+ -- None N/A --
Robin B. Smith--Trustee** 1,000 None N/A $89,957 (11/20)*
Louis A. Weil, III--Trustee 2,771 None N/A $91,250 (13/18)*
Clay T. Whitehead--Trustee 1,000 None N/A $38,292 (5/7)*
<FN>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,034,
$139,869 and $109,294 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
interested Trustees, do not receive compensation from the Fund or any fund
in the Fund Complex.
</TABLE>
As of September 12, 1997, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of the Fund. As of September 12, 1997, Elsie I. Hammond, TOD Bonnie Maret, 6122
NE Upper Wood Road, Lees Summit, MO 64064-2441, was the beneficial owner of
29,975 Class C shares of the Fund (5.8%) and Prudential Employee Saving Pl,
ATTN: Cara India, 71 Hanover Road, Florham Park, NJ 07932-1502, and Prudential
Trust Company, FBO PRU-DC Trust Accounts, ATTN: John Surdy, 30 Scranton Office
Park, Moosic, PA 18507-1791 were the beneficial owners of 6,287,451 and
2,691,335 Class Z shares of the Fund (67.2% and 28.7%, respectively).
As of September 12, 1997, Prudential Securities was record holder for other
beneficial owners of 15,503,969 Class A shares (or 42.9% of the outstanding
Class A shares) of the Fund, 13,370,319 Class B shares (or 31.1% of the
outstanding Class B shares) of the Fund, 162,637 Class C shares (or 31.9% of the
outstanding Class C shares) and 6,622 Class Z shares (or .02% of the outstanding
Class Z shares) of the Fund. 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 Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC), as successor to Prudential
Mutual Fund Management, Inc. (PIFM or the Manager), Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. PIFM 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
B-16
<PAGE>
August 31, 1997, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $58.7 billion.
According to the Investment Company Institute, as of June 30, 1997, the
Prudential Mutual Funds were the th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PIFM, 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), PIFM, 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 portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PIFM is obligated to keep certain books and records of the Fund. PIFM
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
PIFM for the Fund are not exclusive under the terms of the Management Agreement
and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .65 of 1% of the average daily net assets of the Fund. 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
PIFM, 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 PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Fund. No such
reductions were required during the fiscal year ended July 31, 1997. No
jurisdiction currently limits the Fund's expenses.
In connection with its management of the business affairs of the Fund, PIFM
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 PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM 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,
doing business as Prudential Investments (PI or the Subadviser), pursuant to the
subadvisory agreement between PIFM and PI (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 and the states, 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-17
<PAGE>
The Management Agreement provides that PIFM 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 21, 1997 and by
shareholders of the Fund on February 19, 1988.
For the fiscal year ended July 31, 1997, 1996 and 1995, PIFM received
management fees of $ , $6,838,104 and $5,490,654 on behalf of the Fund
(amounts include payments by the Strategy Portfolio, which transferred its
assets to the Fund in July, 1997).
PIFM has entered into the Subadvisory Agreement with PI. The Subadvisory
Agreement provides that PI will furnish investment advisory services in
connection with the management of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. PIFM continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises PI's performance of such services. PI is reimbursed by
PIFM for the reasonable costs and expenses incurred by PI 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 21,
1997, and by shareholders 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, PIFM or PI 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), Prudential Securities incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. Prudential
Securities also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of which is reimbursed by or paid for by
the Fund. 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
B-18
<PAGE>
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 21, 1997. The Class A Plan, as amended, was
approved by Class A and Class B shareholders of the Fund, and the Class B Plan,
as amended, was approved by Class B shareholders of the Fund on July 19, 1994.
The Class C Plan was approved by the sole shareholder of Class C shares of the
Fund on August 1, 1994.
CLASS A PLAN. For the fiscal year ended July 31, 1997, PSI received payments
of $927,800 on behalf of the Fund (both the Balanced Portfolio and the Strategy
Portfolio) 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, 1997, PSI also received
approximately $380,200 on behalf of the Fund (both the Balanced Portfolio and
the Strategy Portfolio) in initial sales charges.
CLASS B PLAN. For the fiscal year ended July 31, 1997, Prudential Securities
received $5,615,200 from the Fund (both the Balanced Portfolio and the Strategy
Portfolio) under the Class B Plan and spent approximately the following amounts
on behalf of the Fund:
<TABLE>
<CAPTION>
PRINTING AND COMMISSION COMPENSATION
MAILING PAYMENTS TO TO PRUSEC FOR
PROSPECTUSES TO FINANCIAL OVERHEAD COMMISSION APPROXIMATE
OTHER THAN ADVISERS OF COSTS PAYMENTS TO TOTAL AMOUNT
CURRENT PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND SPENT BY
SHAREHOLDERS SECURITIES SECURITIES* OTHER EXPENSES* DISTRIBUTOR
--------------- ----------- --------------- ------------------- --------------
<S> <C> <C> <C> <C>
$18,300 $ 927,800 $ 1,167,400 $1,723,000 $ 3,836,500
0.5% 24.2% 30.4% 44.9% 100%
<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 Prospectus. For the fiscal year ended July 31, 1997, Prudential
Securities received approximately $1,176,100 on behalf of the Fund (both the
Balanced Portfolio and the Strategy Portfolio) in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended July 31, 1997, Prudential Securities
received $53,400 on behalf of the Fund (both the Balanced Portfolio and the
Strategy Portfolio) under the Class C Plan and spent approximately $55,900 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
(50.4% or $28,200), (ii) payments to Prusec (31.5% or $17,600) and (iii) an
allocation of overhead and other branch office distribution related expenses for
payments of related expenses (18.1% or $10,100). 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, 1997, Prudential Securities received approximately
$5,100 on behalf of the Fund (both the Balanced Portfolio and the Strategy
Portfolio) 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
B-19
<PAGE>
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 Fund 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 the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the federal securities laws. The restated Distribution
Agreement was last approved by the Trustees, including a majority of the Rule
12b-1 Trustees, on May 21, 1997.
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 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 serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. Prudential
Securities reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director will submit compliance
reports which will identify all such allegations or instances of criminal
conduct and material improprieties every three months and will continue to do so
for a three-year period.
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%
B-20
<PAGE>
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 the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. Broker-dealers may receive brokerage
commissions on portfolio transactions, including options and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities and bonds, including convertible
bonds, are generally traded on a "net" basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities in any transaction in which Prudential Securities (or any
affiliate) acts as principal. Thus, it will not deal with Prudential Securities
acting as market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities acting as
principal with respect to any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by the
Manager in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than the Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker, dealer or
futures commission merchant in the light of generally prevailing rates. The
policy of the Manager is to pay higher commissions to brokers, other than
Prudential Securities, for particular transactions than might be charged if a
different broker had been selected, on occasions when, in the Manager's opinion,
this policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers other than Prudential Securities in order
to secure research and investment services described above, subject to review by
the Fund's Trustees from time to time as to the extent and continuation of this
practice. The allocation of orders among brokers and the commission rates paid
are reviewed periodically by the Fund's Trustees. Portfolio securities may not
be purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in the opinion of the Fund,
will not significantly affect the Fund's ability to pursue its present
investment objectives. However, in the future in other circumstances, the Fund
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
B-21
<PAGE>
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 the Fund 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 Fund 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, 1997:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1996 JULY 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund............................ $ 1,432,068 $ 1,622,075 $ 1,810,839
Total brokerage commissions paid to Prudential
Securities............................................................. $ 77,615 $ 83,991 $ 106,448
Percentage of total brokerage commissions paid to Prudential
Securities............................................................. 5.4% 5.2% 5.9%
</TABLE>
The Fund effected approximately 5.4% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1997. Of the total brokerage commissions paid
during such period, $973,014.65 (or 68.04%), was paid to firms which provide
research, statistical or other services to PIFM on behalf of the Fund. PIFM 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 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). Class Z shares of the Fund
are offered to a limited group of investors at net asset value without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class of shares represents an interest in the same assets of the Fund
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 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 a limited group of investors. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."
B-22
<PAGE>
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*, Class C* and Class Z shares of the Fund are sold at net asset
value. Using the Fund's net asset value at July 31, 1997, the maximum offering
price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share..... $14.01
Maximum sales charge (5% of offering price)................ .74
------
Maximum offering price to public........................... $14.75
------
------
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $13.96
------
------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $13.96
------
------
CLASS Z
Net asset value, offering price and redemption price to
public per Class Z share................................. $14.01
------
------
<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);
(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.
B-23
<PAGE>
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 the
Fund 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 the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund 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.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. 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 an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. 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. Investors
electing to purchase Class A shares of a Portfolio pursuant to a Letter of
Intent should carefully read such Letter of Intent.
B-24
<PAGE>
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, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
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 the Fund purchased
prior to August 1, 1994 if, immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
---------------------------------------
YEAR SINCE PURCHASE 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-25
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, 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 the Fund. 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
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 the Fund. 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 the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-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, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
shares and Class C shares of the Fund for Class B and Class C shares of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc., a money market fund. No CDSC will be payable upon such exchange, but
a CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of an exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial purchase,
rather than the date of the exchange.
B-26
<PAGE>
Class B and Class C shares of the Fund 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 the Fund 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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
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 60 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-27
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund 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 Fund. 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.
B-28
<PAGE>
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNT. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
---------------------------------- -------- --------
<S> <C> <C>
10 years.......................... $ 26,165 $ 31,291
15 years.......................... 44,675 58,649
20 years.......................... 68,109 98,846
25 years.......................... 97,780 157,909
30 years.......................... 135,346 244,692
<FN>
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of 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 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 marketed 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 part of
a 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 trading on the applicable commodities exchange.
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 reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of
B-29
<PAGE>
the Manager or Subadviser (or Valuation Committee or Board of Trustees), does
not represent fair value, are valued by the Valuation Committee or Board in
consultation with the Manager and Subadviser. Short-term debt securities are
valued at cost, with interest accrued or discount amortized to the date of
maturity, if their original maturity was 60 days or less, unless this is
determined by the Trustees not to represent fair value. Short-term securities
with remaining maturities of 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 Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Net asset value (NAV) is calculated separately for each class. 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. 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
Class Z shares are not subject to any distribution or service fee. It is
expected, however, that the NAV per share of each class will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution and/or service fee expense accrual
differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For federal tax purposes, the Fund is treated as a separate taxable entity.
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 Fund (but not its shareholders) from paying federal income tax on
income which is distributed to shareholders, and permits net capital gains of
the Fund (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 Fund are held. Net capital gains of the
Fund which are available for distribution to shareholders will be computed by
taking into account any capital loss carryforward of the Fund.
Qualification of the Fund as a regulated investment company requires, among
other things, that (a) at least 90% of the Fund'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 Fund 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 securities) (the "short-short rule"); (c) the Fund
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the 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 value of the assets of the Fund 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); and (d) the Fund distribute to its
shareholders at least 90% of its net investment income and net short-term gains
(I.E., the excess of net short-term capital gains over net long-term capital
losses) in each year. Effective for taxable years beginning after August 5,
1997, the Taxpayer Relief Act of 1997 has repealed the "short-short rule"
described in clause (b) of this paragraph. Accordingly, effective as of the
Fund's taxable year beginning August 1, 1998, the Fund will no longer be
required to comply with the short-short rule.
Gains or losses on sales of securities by the Fund will generally 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 Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. 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. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will generally
realize short-term capital gain or loss. If securities are sold by the Fund
pursuant to the exercise of a call option written by it, the Fund 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 the Fund pursuant to the exercise of a put option written by it, the Fund
will subtract the premium received from its
B-30
<PAGE>
cost basis in the securities purchased. Certain transactions of the Fund may be
subject to wash sale, short sale, constructive sale, straddle and
anti-conversion provisions of the Internal Revenue Code which may, among other
things, require the Fund to defer recognition of losses. In addition, debt
securities acquired by the Fund may be subject to original issue discount and
market discount rules which, respectively, may cause the Fund to accrue income
in advance of the receipt of cash with respect to interest or cause gains to be
treated as ordinary income.
Special rules will apply to most options on stock indices, futures contracts
and options thereon, and forward foreign currency exchange contracts in which
the Fund may invest. See "Investment Objective and Policies." These investments
will generally constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of the Fund's
taxable year; that is, treated as having been sold at market value. Except with
respect to certain 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.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes. Positions which
are part of a straddle will be subject to certain wash sale, short sale and
constructive sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund. Straddles may also result in the loss of the holding
period of the underlying property and therefore the Fund's ability to enter into
forward currency contracts, options and futures contracts may be limited by the
short-short rule.
The Fund's ability to hold foreign currencies or engage in hedging
activities may be limited by the short-short rule.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund 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 or losses,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. If Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund 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 Fund 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 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 the
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
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. The Fund 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, the Fund 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,
the Fund will be subject to a nondeductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which the Fund pays income
tax is treated as distributed.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares and sells or otherwise disposes of such
shares within 90 days of acquisition may not be allowed to include certain sales
charges incurred in acquiring such shares for purposes of calculating gain or
loss realized upon a sale or exchange of shares of the Fund.
B-31
<PAGE>
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. 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, Class C and Class Z 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 returns for the Class A shares for the one year,
five year and since inception (January 22, 1990) periods ended July 31, 1997
were 22.63%, 11.51% and 11.78%, respectively. The average annual total returns
for the Class B shares for the one, five and since inception (September 15,
1987) periods ended July 31, 1997 were 23.24%, 11.68% and 9.91%, respectively.
The average annual total returns for the Class C shares for the one year and
since inception (August 1, 1994) periods ended July 31, 1997 were 27.24 % and
14.51%, respectively. The average annual total returns for the Class Z shares
for the one year and since inception (March 1, 1996) periods ended July 31, 1997
were 29.39% and 18.91%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in 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 returns for Class A shares for the one year, five year
and since inception (January 22, 1990) periods ended July 31, 1997 were 29.09%,
81.45% and 143.21%, respectively. The aggregate total returns for Class B shares
for the one year, five year and since inception (September 15, 1987) periods
ended July 31, 1997 were 28.24%, 74.74% and 154.29%, respectively. The aggregate
total returns for Class C shares for the one year and since inception (August 1,
1994) periods ended July 31, 1997 were 28.24% and 50.10%, respectively. The
aggregate total returns for the Class Z shares for the one year and since
inception (March 1, 1996) periods ended July 31, 1997 were 29.39% and 27.79%,
respectively.
B-32
<PAGE>
YIELD. 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, Class C
and Class Z shares. This yield will be computed by dividing the Fund'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>
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The 30-day yields for the period ended July 31, 1997 were 2.37% for the
Class A shares of the Fund; 1.77% for the Class B shares of the Fund; 1.77% for
the Class C shares of the Fund; and 2.74% for the Class Z shares of the Fund.
From time to time, the performance of the Fund 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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
COMPARISON OF
DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926-03/1997)
LONG-TERM GOVT.
COMMON STOCKS BONDS INFLATION
<S> <C> <C> <C>
10.7% 5.0% 3.1%
</TABLE>
(1) Source: Ibbotson Associates. "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. 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. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
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,
B-33
<PAGE>
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 Fund. The Trustees intend to conduct the operations of the
Fund in such a way as to avoid, to the extent possible, ultimate liability of
the shareholders for liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property for satisfaction of claims arising in connection with the
affairs of the Fund. 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 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, divided into separate classes. The Fund,
for federal income tax and Massachusetts state law purposes, will constitute a
trust which will be governed by the provisions of the Declaration of Trust. All
shares of the Fund issued and outstanding are fully paid and nonassessable by
the Fund. Shares of the Fund entitle their holders to one vote per share.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series, and all assets in which such
consideration is invested would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the investment
policies related thereto.
The Trustees have the power to alter the number and the terms of office of
the Trustees and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that at
all times at least a majority of the Trustees has been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50% of the shares voting can, if they choose, elect
all Trustees being selected, while the holders of the remaining shares would be
unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.
Prudential Mutual Fund Services LLC (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 PIFM. 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, 1997, the Fund incurred fees of approximately $1,406,000 for the
services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-34
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JULY 31, 1997 PRUDENTIAL BALANCED FUND+
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--89.8%
COMMON STOCKS--57.4%
- ------------------------------------------------------------
BEVERAGES--0.6%
206,000 PepsiCo, Inc. $ 7,892,375
- ------------------------------------------------------------
CHEMICALS--0.4%
455,400 Agrium Inc. (Canada) 5,174,813
- ------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--1.8%
163,400 Computer Associates International,
Inc. 11,121,413
85,500 Microsoft Corp.* 12,098,250
-------------
23,219,663
- ------------------------------------------------------------
DIVERSFIED CONSUMER PRODUCTS--1.0%
58,600 The Unilever Group 12,774,800
- ------------------------------------------------------------
ELECTRICAL SERVICES--2.8%
241,700 Duke Energy Corp. 12,251,168
121,100 Long Island Lighting Co. 2,974,519
249,300 Texas Utilities Co. 8,834,569
520,500 Unicom Corp. 11,808,844
-------------
35,869,100
- ------------------------------------------------------------
ENTERTAINMENT--0.6%
169,000 Carnival Corp. 7,119,125
- ------------------------------------------------------------
FINANCIAL SERVICES--3.6%
69,000 Chase Manhattan Corp. 7,835,813
349,600 Federal National Mortgage Association 16,540,450
125,600 Imperial Credit Industries, Inc.* 2,920,200
498,700 The Money Store, Inc. 17,890,862
-------------
45,187,325
- ------------------------------------------------------------
FOODS--0.7%
375,000 Archer-Daniels-Midland Co. 8,437,500
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
HOSPITAL MANAGEMENT--1.3%
351,000 Columbia/HCA Healthcare Corp. $ 11,319,750
168,400 Manor Care, Inc. 5,557,200
-------------
16,876,950
- ------------------------------------------------------------
INSURANCE--3.9%
64,800 American International Group, Inc. 6,901,200
89,800 CIGNA Corp. 17,915,100
146,400 Provident Companies, Inc. 9,278,100
203,433 Travelers Group, Inc. 14,634,461
-------------
48,728,861
- ------------------------------------------------------------
INSURANCE HMO--2.2%
203,100 Aetna, Inc. 23,140,706
138,100 Sierra Health Services, Inc.* 4,540,038
-------------
27,680,744
- ------------------------------------------------------------
LODGING--1.9%
441,100 Hilton Hotels Corp. 13,867,081
492,900 La Quinta Inns, Inc. 10,350,900
-------------
24,217,981
- ------------------------------------------------------------
MEDIA--1.0%
149,800 Walt Disney Co. 12,105,713
- ------------------------------------------------------------
MEDICAL PRODUCTS--1.5%
112,000 Boston Scientific Corp.* 8,036,000
175,400 Johnson & Johnson 10,929,613
-------------
18,965,613
- ------------------------------------------------------------
METALS-NON FERROUS--1.5%
406,400 UCAR International Inc.* 18,135,600
</TABLE>
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-35
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JULY 31, 1997 PRUDENTIAL BALANCED FUND+
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
NETWORKING--3.8%
422,400 3Com Corp.* $ 23,100,000
146,200 Ascend Communications, Inc.* 7,949,625
168,900 Cisco Systems, Inc.* 13,438,106
402,400 Larscom, Inc.* 3,131,175
-------------
47,618,906
- ------------------------------------------------------------
OIL & GAS--4.8%
222,000 Alberta Energy Co., Ltd. 5,106,000
215,600 Exxon Corp. 13,852,300
555,300 McDermott International, Inc. 16,971,356
59,300 Noble Affiliates, Inc. 2,460,950
304,900 Parker & Parsley Petroleum Co. 11,452,806
93,700 Texaco Inc. 10,875,056
-------------
60,718,468
- ------------------------------------------------------------
OIL & GAS EQUIPMENT & SERVICES--6.1%
237,200 BJ Services Co.* 15,418,000
470,400 Bouygues Offshore S.A. 7,056,000
266,500 J. Ray McDermott, S.A.* 8,544,656
328,400 Schlumberger Ltd. 25,081,550
289,700 Smith International, Inc.* 20,767,869
-------------
76,868,075
- ------------------------------------------------------------
PHARMACEUTICALS--4.0%
402,400 Novartis AG (ADR) (Switzerland) 32,267,448
188,000 Pfizer, Inc. 11,209,500
177,600 Pharmacia & Upjohn, Inc. 6,704,400
-------------
50,181,348
- ------------------------------------------------------------
REALTY INVESTMENT TRUST--2.9%
13,700 Crescent Operating, Inc.* 226,050
294,600 Crescent Real Estate Equities Co. 9,206,250
213,000 Developers Diversified Realty Corp. 8,413,500
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
83,300 Equity Residential Properties Trust $ 4,201,444
379,007 Patriot American Hospitality, Inc. 9,451,486
134,200 Trinet Corporate Realty Trust, Inc. 4,772,487
-------------
36,271,217
- ------------------------------------------------------------
RETAIL--5.1%
411,500 American Stores Co. 10,390,375
231,300 CVS Corp. 13,155,188
149,600 Quality Food Centers, Inc.* 6,273,850
313,000 Sears Roebuck & Co. 19,816,812
442,800 Toys 'R' Us, Inc.* 15,082,875
-------------
64,719,100
- ------------------------------------------------------------
TELECOMMUNICATIONS--5.0%
153,000 ADC Telecommunications, Inc.* 6,177,375
148,500 BellSouth Corp. 7,035,187
376,600 Glenayre Technologies, Inc.* 7,579,075
53,800 Intel Corp. 4,939,512
245,000 MCI Communications Corp. 8,651,562
325,100 Uniphase Corp.* 22,188,075
367,400 Westell Technologies, Inc.* 6,865,788
-------------
63,436,574
- ------------------------------------------------------------
TOBACCO--0.9%
242,700 Philip Morris Co., Inc. 10,951,838
-------------
Total common stocks
(cost $556,397,703) 723,151,689
-------------
PREFERRED STOCKS--0.7%
- ------------------------------------------------------------
RETAIL--0.7%
157,800 Kmart Financing,
Conv. Pfd.
(cost $7,977,872) 8,600,100
-------------
</TABLE>
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-36
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JULY 31, 1997 PRUDENTIAL BALANCED FUND+
- ------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--31.7%
CORPORATE BONDS--24.6%
- ------------------------------------------------------------
AIRLINES--0.5%
Baa3 $ 5,000 United Airlines, Inc.,
10.67%, 5/1/04 $ 6,059,450
- ------------------------------------------------------------
AUTOMOTIVE--0.4%
A1 5,000 Ford Motor Company,
Sr. Note
7.40%, 11/1/46 5,230,100
- ------------------------------------------------------------
BANKS--0.4%
NR 5,000 Skandinaviska Enskilda
Banken,
7.50%, 3/29/49 5,162,500
- ------------------------------------------------------------
CABLE & PAY TELEVISION SYSTEMS--0.4%
Ba3 2,000 Century Communications
Corp.,
Sr. Notes,
9.75%, 2/15/02 2,110,000
Baa3 2,000 Comcast Cable
Communications,
8.375%, 5/1/07 2,206,260
--------------
4,316,260
- ------------------------------------------------------------
CHEMICALS--1.8%
Ba3 2,000 ISP Holdings, Inc.,
Sr. Note
9.75%, 2/15/02 2,155,000
Ba2 6,000 Polysindo International
Finance Co.,
9.375%, 7/30/07 6,075,000
Reliance Industries Ltd.,
Baa3 13,000 8.25%, 1/15/27 13,494,650
Baa3 1,000 10.25%, 1/15/2097 1,120,000
--------------
22,844,650
- ------------------------------------------------------------
DIVESIFIED INDUSTRIAL--0.8%
Hutchison Whampoa Ltd.,
A3 5,000 6.95%, 8/1/07 5,042,187
A3 5,000 7.45%, 8/1/17 5,115,625
--------------
10,157,812
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
ENTERTAINMENT--0.4%
Baa3 $ 5,000 Royal Caribbean Cruises
Ltd.,
Sr. Note
8.25%, 4/1/05 $ 5,404,000
- ------------------------------------------------------------
FINANCIAL SERVICES--7.4%
Ba2 12,000 Conseco Finance Trust,
8.796%, 4/1/27 13,096,920
A2 1,000 First Union Corp.,
9.45%, 6/15/99 1,058,780
Aa2 11,000 Team Fleet Financing
Corp.,
7.35%, 5/15/03 11,379,844
Ford Motor Credit Co.,
A1 6,000 7.32%, 5/23/02 6,234,840
A1 5,000 7.75%, 3/15/05 5,343,750
NR 8,000 Industrial Finance
Corporation of
Thailand,
7.125%, 8/4/02 7,994,000
Baa1 20,000 Lehman Brothers Holdings
Inc.,
6.33%, 8/1/00 20,000,000
Baa1 18,000 Salomon, Inc.,
7.30%, 5/15/02 18,521,100
A2 10,000 Sears Roebuck Acceptance
Corp.,
6.75%, 9/15/05 10,109,100
--------------
93,738,334
- ------------------------------------------------------------
HOSPITAL MANAGEMENT--0.2%
Ba3 2,000 Tenet Healthcare Corp.,
10.125%, 3/1/05 2,205,000
- ------------------------------------------------------------
INSURANCE--0.8%
A2 10,000 American General Corp.,
7.57%, 12/1/45 10,056,250
- ------------------------------------------------------------
MEDIA--2.2%
News America Holdings Inc.,
Baa3 6,000 9.25%, 2/1/13 7,033,860
Baa3 6,000 7.75%, 12/1/45 6,048,360
Ba1 10,000 Time Warner, Inc.,
7.75%, 6/15/05 10,517,100
Ba2 4,500 Viacom, Inc.,
7.75%, 6/1/05 4,548,330
--------------
28,147,650
</TABLE>
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-37
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JULY 31, 1997 PRUDENTIAL BALANCED FUND+
- ------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
OIL & GAS--0.4%
Ba1 $ 5,000 Gulf Canada Resources
Ltd.
Sr. Note
8.35%, 8/1/06 $ 5,350,000
- ------------------------------------------------------------
OIL & GAS EQUIPMENT & SERVICES--0.3%
Baa3 3,500 BJ Services Co.,
7.00%, 2/1/06 3,543,925
- ------------------------------------------------------------
PAPER & FOREST PRODUCTS--1.0%
Baa3 3,000 Fort Howard Corp.,
9.25%, 3/15/01 3,270,150
Baa3 7,300 James River Corp. Va.,
9.25%, 11/15/21 8,862,054
--------------
12,132,204
- ------------------------------------------------------------
RAILROAD & TRUCKING--1.7%
Baa2 10,000 CSX Corp.,
7.45%, 5/1/07 10,535,700
Baa1 11,000 Norfolk Southern Corp.,
6.95%, 5/1/02 11,286,550
--------------
21,822,250
- ------------------------------------------------------------
RESTAURANTS--0.5%
Darden Restaurants, Inc.,
Baa1 2,500 6.375%, 2/1/06 2,388,525
Baa1 4,500 7.125%, 2/1/16 4,190,580
--------------
6,579,105
- ------------------------------------------------------------
RETAIL--1.8%
Federated Dept. Stores, Inc.,
Baa2 9,000 8.125%, 10/15/02 9,660,060
Baa2 2,500 Sr. Note
8.50%, 6/15/03 2,734,525
Ba3 5,000 K Mart Corp.,
8.125%, 12/1/06 4,900,000
B2 7,566 Sunglass Hut
International, Inc.,
5.25%, 6/15/03 5,579,925
--------------
22,874,510
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
TECHNOLOGY--0.2%
Baa3 $ 2,000 Seagate Technology, Inc.,
7.45%, 3/1/37 $ 2,087,720
- ------------------------------------------------------------
TELECOMMUNICATIONS--1.8%
Ba1 17,000 Tele-Communications Inc.,
9.25%, 4/15/02 18,629,790
Ba1 4,000 Worldcom Inc.,
Sr. Note
7.75%, 4/1/27 4,304,360
--------------
22,934,150
- ------------------------------------------------------------
TOBACCO--0.7%
RJR Nabisco, Inc.,
Baa3 5,000 7.625%, 9/15/03 5,033,650
Baa3 3,000 8.25%, 7/1/04 3,116,250
--------------
8,149,900
- ------------------------------------------------------------
UTILITIES - ELECTRIC--0.9%
Cleveland Electric
Illuminating,
NR 2,000 7.67%, 7/1/04 2,062,400
NR 3,000 7.19%, 7/1/00 3,043,800
Ba1 6,000 Western Massachusetts
Electric Co.,
7.375%, 7/1/01 6,000,000
--------------
11,106,200
--------------
Total corporate bonds
(cost $298,334,063) 309,901,970
--------------
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.5%
ICI Funding Corp.,
6,773 7.60%, 7/25/28
(cost $6,784,641) 6,925,393
--------------
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--1.8%
United States Treasury
Bonds,
5,300 13.75%, 8/15/04 7,627,866
900 6.50%, 11/15/26 919,971
3,000 6.625%, 2/15/27 3,132,180
United States Treasury
Notes,
2,000 6.00%, 7/31/02 2,005,937
4,400 5.75%, 8/15/03 4,359,432
</TABLE>
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-38
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JULY 31, 1997 PRUDENTIAL BALANCED FUNDD
- ------------------------------------------------------------
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (cont'd.)
$ 2,900 5.875%, 2/15/04 $ 2,888,226
500 7.25%, 5/15/04 535,470
1,300 7.25%, 8/15/04 1,393,431
--------------
Total U.S. government
securities
(cost $22,272,710) 22,862,513
--------------
- ------------------------------------------------------------
FOREIGN GOVERNMENT BONDS--4.8%
Ba1 3,750 Bangko Sentral Ng
Philipinas,
8.60%, 6/15/27 3,757,875
NR City of Moscow,
1,000 9.50%, 5/31/00 1,023,400
9,000 9.50%, 5/31/00 9,210,600
Baa3 2,000 Republic of Colombia,
7.625%, 2/15/07 2,012,860
Aa3 10,000 Republic of Panama,
3.75%, 7/17/14 7,800,000
Aa3 6,000 Republic of Poland,
4.00%, 10/27/14 5,257,500
Baa3 3,000 Republic of South Africa,
8.50%, 6/23/17 3,168,750
Ba2 2,750 Republic of Venezuela,
6.75%, 12/18/07 2,564,375
NR 5,000 Russian Ministry of
Finance,
10.00%, 6/26/07 5,155,000
United Mexican States,
Baa3 16,500 7.875%, 8/6/01 16,500,000
Ba2 3,000 11.50%, 5/15/26 3,664,500
--------------
Total foreign government
bonds
(cost $59,166,658) 60,114,860
--------------
Total debt obligations
(cost $386,558,072) 399,804,736
--------------
Total long-term
investments
(cost $950,933,647) 1,131,556,525
--------------
SHORT-TERM INVESTMENTS--7.5%
CORPORATE BONDS
- ------------------------------------------------------------
BEVERAGES
A3 500 Coca Cola Enterprises, Inc.,
6.50%, 11/15/97 500,720
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) DESCRIPTION VALUE (NOTE 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
FINANCIAL SERVICES
Aa3 $ 200 Associates Corp. of North
America,
Sr. Note,
8.375%, 1/15/98 $ 202,098
- ------------------------------------------------------------
OIL & GAS EQUIPMENT & SERVICES
Baa3 1,000 Arkla, Inc.,
9.30%, 1/15/98 1,011,590
--------------
Total corporate bonds
(cost $1,799,614) 1,714,408
--------------
- ------------------------------------------------------------
FOREIGN GOVERNMENT BONDS
13,950 Argentina Government
Bond,
5.83%, 9/1/97
(cost $556,497) 562,185
--------------
- ------------------------------------------------------------
REPURCHASE AGREEMENT--7.3%
92,431 Joint Repurchase
Agreement Account
5.79%, 8/1/97,
(cost $92,431,000;
Note 5) 92,431,000
--------------
Total short-term
investments
(cost $94,787,111) 94,707,593
--------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--97.3%
(cost $1,045,720,758;
Note 4) 1,226,264,118
Other assets in excess of
liabilities--2.7% 33,393,439
--------------
Net Assets--100% $1,259,657,557
--------------
--------------
</TABLE>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and
Standard & Poor's ratings.
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-39
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL BALANCED FUND+
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JULY 31, 1997
<S> <C>
Investments, at value (cost $1,045,720,758)................................................................. $1,226,264,118
Foreign currency, at value (cost $15,197)................................................................... 15,141
Cash........................................................................................................ 7,847,852
Receivable for investments sold............................................................................. 82,677,891
Dividends and interest receivable........................................................................... 7,396,858
Receivable for Fund shares sold............................................................................. 354,477
Prepaid expenses............................................................................................ 47,694
--------------
Total assets............................................................................................. 1,324,604,031
--------------
LIABILITIES
Payable for investments purchased........................................................................... 59,272,776
Payable for Fund shares reacquired.......................................................................... 4,311,598
Management fee payable...................................................................................... 522,963
Distribution fee payable.................................................................................... 466,246
Accrued expenses............................................................................................ 347,447
Foreign withholding tax payable............................................................................. 25,444
--------------
Total liabilities........................................................................................ 64,946,474
--------------
NET ASSETS.................................................................................................. $1,259,657,557
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 900,643
Paid-in capital in excess of par......................................................................... 1,001,211,919
--------------
1,002,112,562
Undistributed net investment income...................................................................... 1,986,876
Accumulated net realized gain on investments............................................................. 75,014,815
Net unrealized appreciation on investments and foreign currencies........................................ 180,543,304
--------------
Net assets, July 31, 1997................................................................................... $1,259,657,557
--------------
--------------
Class A:
Net asset value and redemption price per share
($497,460,568 DIVIDED BY 35,501,829 shares of beneficial interest issued and outstanding)............. $14.01
Maximum sales charge (5% of offering price).............................................................. .74
------
Maximum offering price to public......................................................................... $14.75
------
------
Class B:
Net asset value, offering price and redemption price per share
($625,715,139 DIVIDED BY 44,826,764 shares of beneficial interest issued and outstanding)............. $13.96
------
------
Class C:
Net asset value, offering price and redemption price per share
($7,022,825 DIVIDED BY 502,888 shares of beneficial interest issued and outstanding).................. $13.96
------
------
Class Z:
Net asset value, offering price and redemption price per share
($129,459,025 DIVIDED BY 9,237,760 shares of beneficial interest issued and outstanding).............. $14.01
------
------
</TABLE>
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-40
<PAGE>
PRUDENTIAL BALANCED FUND+
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME JULY 31, 1997
-------------
<S> <C>
Income
Interest (net of foreign withholding taxes
of $20,875)............................. $ 26,672,785
Dividends (net of foreign withholding taxes
of $53,721)............................. 7,099,330
-------------
Total income............................ 33,772,115
-------------
Expenses
Distribution fee--Class A.................. 766,791
Distribution fee--Class B.................. 4,314,247
Distribution fee--Class C.................. 47,903
Management fee............................. 5,475,097
Transfer agent's fees and expenses......... 1,486,000
Reports to shareholders.................... 347,000
Custodian's fees and expenses.............. 147,000
Legal fees................................. 95,000
Registration fees.......................... 95,000
Insurance.................................. 22,000
Audit fees................................. 21,000
Trustees' fees and expenses................ 19,000
Miscellaneous.............................. 1,317
-------------
Total expenses.......................... 12,837,355
-------------
Net investment income......................... 20,934,760
-------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investment transactions.................... 92,746,855
Foreign currency transactions.............. 75,210
-------------
92,822,065
-------------
Net change in unrealized appreciation on
investments................................ 97,850,789
-------------
Net gain on investments....................... 190,672,854
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..................... $ 211,607,614
-------------
-------------
</TABLE>
PRUDENTIAL BALANCED FUND+
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
INCREASE (DECREASE) -------------------
IN NET ASSETS 1997 1996
---- ----
<S> <C> <C>
Operations
Net investment income........ $ 20,934,760 $ 14,155,270
Net realized gain on
investments and foreign
currency transactions..... 92,822,065 42,413,859
Net change in unrealized
appreciation
(depreciation) of
investments............... 97,850,789 (32,532,379)
-------------- -------------
Net increase in net assets
resulting from
operations................ 211,607,614 24,036,750
-------------- -------------
Net equalization credits
(debits)..................... -- 266,040
-------------- -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment income
Class A................... (8,678,960) (5,700,390)
Class B................... (8,766,533) (7,051,910)
Class C................... (97,195) (41,036)
Class Z................... (2,758,541) (56,180)
-------------- -------------
(20,301,229) (12,849,516)
-------------- -------------
Distributions from net
realized gains on
investment transactions
Class A................... (17,250,282) (10,904,493)
Class B................... (26,414,816) (17,821,478)
Class C................... (273,589) (80,545)
Class Z................... (6,764,801) --
-------------- -------------
(50,703,488) (28,806,516)
-------------- -------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares sold
(Note 7).................. 583,212,616 382,325,569
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions......... 65,884,101 37,994,029
Cost of shares reacquired.... (220,143,556) (228,029,907)
-------------- -------------
Net increase in net assets
from Fund shares
transactions.............. 428,953,161 192,289,691
-------------- -------------
Total increase.................. 569,556,058 174,936,449
NET ASSETS
Beginning of year............... 690,101,499 515,165,050
-------------- -------------
End of year..................... $1,259,657,557 $ 690,101,499
-------------- -------------
-------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
Prudential Balanced 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. The investment objective of the Fund 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 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. The Fund changed its name from Prudential Allocation
Fund--Balanced Portfolio to Prudential Balanced Fund, effective July 25, 1997.
- ------------------------------------------------------------
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 which approximates market value.
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.
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 onthe accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain
estimates by management.
- --------------------------------------------------------------------------------
B-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
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.
FEDERAL INCOME TAXES: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to 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.
EQUALIZATION: Effective August 1, 1996, the Fund 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 balance of $2,024,805 of undistributed net investment income at July
31, 1996, resulting from equalization was transferred to paid-in capital in
excess of par. Such reclassification had no effect on net assets, results of
operations, or net asset value per share.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with 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 July 31, 1997, the
Fund decreased undistributed net investment income and increased accumulated net
realized gain on investments by $95,218. Net realized gains and net assets were
not affected by this change.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI") which acts as the distributor of the Class A, Class B, Class C and Class
Z shares. The Fund compensates 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. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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%
- --------------------------------------------------------------------------------
B-43
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended July 31, 1997.
PSI has advised the Fund that it received approximately $270,000 in front-end
sales charges resulting from sales of Class A shares during the year ended July
31, 1997. From these fees, PSI paid such sales charges to affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PSI has advised the Fund that for the fiscal year ended July 31, 1997, it
received approximately $784,000 and $4,400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PSI, PIC and PIFM are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of July 31, 1997.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro-rata basis by the Funds.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended July 31, 1997, the
Fund incurred fees of approximately $1,406,000 for the services of PMFS. As of
July 31, 1997, approximately $209,000 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 fiscal year ended July 31, 1997, PSI received approximately $77,600 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities of the Fund, other than short-term
investments, for the fiscal year ended July 31, 1997, were $407,908,584 and
$173,307,821, respectively.
The cost basis of investments for federal income tax purposes as of July 31,
1997 was $1,045,780,775 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $180,483,343 (gross unrealized
appreciation--$189,621,984; gross unrealized depreciation--$9,138,641).
- ------------------------------------------------------------
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, 1997, the Fund
had an 8.3% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $92,431,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor was as follows:
Deutsche Morgan Grenfell/C.J. Lawerence Inc., 5.79%, dated 7/31/97, in the
principal amount of $350,000,000, repurchase price $350,056,292, due 8/1/97. The
value of the collateral including accrued interest is $357,000,060.
Goldman, Sachs & Co., Inc., 5.79%, dated 7/31/97, in the principal amount of
$350,000,000, repurchase price $350,056,292, due 8/1/97. The value of the
collateral including accrued interest is $357,000,540.
SBC Warburg, 5.78% dated 7/31/97, in the principal amount of $350,000,000,
repurchase price $350,056,194, due 8/1/97. The value of the collateral including
accrued interest is $358,354,468.
UBS Securities, 5.875%, dated 7/31/97, in the principal amount of $62,598,000,
repurchase price $62,608,216, due 8/1/97. The value of the collateral including
accrued interest is $63,853,121.
- --------------------------------------------------------------------------------
B-44
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
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 year ended July 31, 1997
and fiscal year ended July 31, 1996 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1997:
Shares sold....................... 3,337,159 $ 42,801,873
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio (Note 7).............. 10,702,166 148,314,174
Shares issued in reinvestment of
dividends and distributions..... 1,818,378 23,032,477
Shares reacquired................. (7,231,992) (92,932,910)
----------- -------------
Net increase in shares outstanding
before conversion............... 8,625,711 121,215,614
Shares issued upon conversion from
Class B......................... 4,759,297 60,515,298
----------- -------------
Net increase in shares
outstanding..................... 13,385,008 $ 181,730,912
----------- -------------
----------- -------------
Year ended July 31, 1996:
Shares sold....................... 6,671,164 $ 80,509,210
Shares issued in connection with
acquisition of Prudential
IncomeVertible -Registered
Trademark- Fund, Inc............ 12,372,804 153,694,070
Shares issued in reinvestment of
dividends and distributions..... 1,222,084 14,673,158
Shares reacquired................. (10,761,405) (130,646,163)
----------- -------------
Net increase in shares outstanding
before conversion............... 9,504,647 118,230,275
Shares issued upon conversion from
Class B......................... 2,661,105 32,556,721
----------- -------------
Net increase in shares
outstanding..................... 12,165,752 $ 150,786,996
----------- -------------
----------- -------------
<CAPTION>
CLASS B SHARES AMOUNT
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1997:
Shares sold....................... 4,838,750 $ 61,524,309
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio (Note 7).............. 13,556,615 187,167,091
Shares issued in reinvestment of
dividends and distributions..... 2,613,632 32,974,262
Shares reacquired................. (7,023,090) (89,550,269)
----------- -------------
Net increase in shares outstanding
before conversion............... 13,985,907 192,115,393
Shares reacquired upon conversion
into Class A.................... (4,781,062) (60,515,298)
----------- -------------
Net increase in shares
outstanding..................... 9,204,845 $ 131,600,095
----------- -------------
----------- -------------
Year ended July 31, 1996:
Shares sold....................... 5,453,476 $ 65,698,493
Shares issued in connection with
acquisition of Prudential
IncomeVertible -Registered
Trademark- Fund, Inc............ 5,994,600 74,209,881
Shares issued in reinvestment of
dividends and distributions..... 1,934,648 23,143,383
Shares reacquired................. (7,782,895) (93,671,895)
----------- -------------
Net increase in shares outstanding
before conversion............... 5,599,829 69,379,862
Shares reacquired upon conversion
into Class A.................... (2,673,189) (32,556,721)
----------- -------------
Net increase in shares
outstanding..................... 2,926,640 $ 36,823,141
----------- -------------
----------- -------------
<CAPTION>
CLASS C
- ----------------------------------
<S> <C> <C>
Year ended July 31, 1997:
Shares sold....................... 232,388 $ 2,935,142
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio (Note 7).............. 91,197 1,259,091
Shares issued in reinvestment of
dividends and distributions..... 28,051 354,029
Shares reacquired................. (147,414) (1,879,415)
----------- -------------
Net increase in shares
outstanding..................... 204,222 $ 2,668,847
----------- -------------
----------- -------------
Year ended July 31, 1996:
Shares sold....................... 279,411 $ 3,368,769
Shares issued in connection with
acquisition of Prudential
IncomeVertible -Registered
Trademark- Fund, Inc............ 252 3,122
Shares issued in reinvestment of
dividends and distributions..... 10,109 121,326
Shares reacquired................. (244,931) (2,928,958)
----------- -------------
Net increase in shares
outstanding..................... 44,841 $ 564,259
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
B-45
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z SHARES AMOUNT
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1997:
Shares sold....................... 2,901,740 $ 37,167,348
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio (Note 7).............. 891 12,363
Shares issued in connection with
acquisition of The Prudential
Institutional Fund--Balanced
Fund (Note 7)................... 8,056,026 102,031,225
Shares issued in reinvestment of
dividends and distributions..... 752,454 9,523,333
Shares reacquired................. (2,812,213) (35,780,962)
----------- -------------
Net increase in shares
outstanding..................... 8,898,898 $ 112,953,307
----------- -------------
----------- -------------
March 1, 1996* through
July 31, 1996:
Shares sold....................... 398,041 $ 4,842,024
Shares issued in reinvestment of
dividends and distributions..... 4,624 56,162
Shares reacquired................. (63,803) (782,891)
----------- -------------
Net increase in shares
outstanding..................... 338,862 $ 4,115,295
----------- -------------
----------- -------------
</TABLE>
- ---------------
* Commencement of offering of Class Z shares.
- ------------------------------------------------------------
NOTE 7. ACQUISITION OF THE PRUDENTIAL INSTITUTIONAL FUND--BALANCED FUND AND
PRUDENTIAL ALLOCATION FUND--STRATEGY PORTFOLIO
On September 20, 1996, the Fund acquired all the net assets of the Prudential
Institutional Fund-Balanced Fund ("Balanced Fund") pursuant to a plan of
reorganization approved by Balanced Fund shareholders on September 6, 1996. The
acquisition was accomplished by a tax-free exchange of 8,056,026 Class Z shares
of the Fund (valued at $102,031,225) for 8,387,005 shares of Balanced Fund
outstanding on September 20, 1996. Balanced Fund's net assets at that date
($102,031,225), including $8,097,968 of unrealized appreciation, were combined
with those of the Fund. The aggregate net assets of the Fund and Balanced Fund
immediately before the acquisition were $728,255,658 and $102,031,225,
respectively.
On July 25, 1997, the Fund acquired all the net assets of the Prudential
Allocation Fund-Strategy Portfolio ("Strategy Portfolio") pursuant to a plan of
reorganization approved by the Strategy Portfolio shareholders on July 18, 1997.
The acquisition was accomplished by a tax-free exchange of 10,702,166 Class A
shares, 13,556,615 Class B shares, 91,197 Class C shares, and 891 Class Z shares
of the Fund (valued at $336,752,719) for 12,158,362 Class A shares, 15,434,201
Class B shares, 103,828 Class C shares and 1,010 Class Z shares, respectively,
of Strategy Portfolio outstanding on July 25, 1997. Strategy Portfolio's net
assets at that date ($336,752,719), including $46,155,059 of unrealized
appreciation, were combined with those of the Fund. The aggregate net assets of
the Fund and Strategy Portfolio immediately before the acquisition were
$913,953,643 and $336,752,719 respectively.
- ------------------------------------------------------------
NOTE 8. DIVIDENDS
On September 18, 1997 the Board of Trustees of the Fund declared the following
dividends per share, payable on September 25, 1997 to shareholders of record on
September 22, 1997:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND C CLASS Z
-------- -------- --------
<S> <C> <C> <C>
Ordinary Income.................. $0.0850 $0.0600 $0.0925
</TABLE>
- --------------------------------------------------------------------------------
B-46
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL BALANCED FUND+
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
YEAR ENDED JULY 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.85 $ 12.04 $ 11.12 $ 11.75 $ 11.00
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ .34 .31 .34 .33 .43
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.96 .28 1.11 (.05) 1.16
-------- -------- -------- ------- -------
Total from investment
operations..................... 3.30 .59 1.45 .28 1.59
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.36) (.29) (.33) (.37) (.37)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.78) (.49) (.20) (.54) (.47)
-------- -------- -------- ------- -------
Total distributions............... (1.14) (.78) (.53) (.91) (.84)
-------- -------- -------- ------- -------
Net asset value, end of year......... $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):..................... 29.09% 4.89% 13.67% 2.39% 15.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $497,461 $262,096 $119,829 $37,512 $22,605
Average net assets (000)............. $306,717 $246,609 $ 69,754 $29,875 $15,392
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.17% 1.20% 1.22% 1.23% 1.17%
Expenses, excluding distribution
fees........................... .92% .95% .97% 1.00% .97%
Net investment income............. 2.84% 2.53% 2.90% 2.84% 3.88%
For Class A, B, C and Z shares:
Portfolio turnover rate........... 140% 97% 201% 108% 83%
Average commission rate paid per
share $.0577 $.0569 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.
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-47
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL BALANCED FUND+
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
YEAR ENDED JULY 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ .26 .21 .26 .24 .34
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.95 .28 1.10 (.05) 1.16
-------- -------- -------- -------- --------
Total from investment
operations..................... 3.21 .49 1.36 .19 1.50
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.27) (.20) (.25) (.28) (.29)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.78) (.49) (.20) (.54) (.47)
-------- -------- -------- -------- --------
Total distributions............... (1.05) (.69) (.45) (.82) (.76)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):..................... 28.24% 4.05% 12.79% 1.61% 14.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $625,715 $420,465 $392,291 $445,609 $321,831
Average net assets (000)............. $431,425 $437,792 $409,419 $392,133 $267,340
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.92% 1.95% 1.97% 2.00% 1.97%
Expenses, excluding distribution
fees........................... .92% .95% .97% 1.00% .97%
Net investment income............. 2.09% 1.78% 2.34% 2.08% 3.04%
</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.
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-48
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL BALANCED FUND+
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS Z
-------------------------------------- ------------------------
AUGUST 1, MARCH 1,
1994(A) 1996(D)
YEAR ENDED JULY 31, THROUGH YEAR ENDED THROUGH
------------------------ JULY 31, JULY 31, JULY 31,
1997 1996 1995 1997 1996
----- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.80 $ 12.00 $ 11.12 $ 11.85 $12.16
----- -------- --------- ----------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ .26 .21 .21 .46 .13
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.95 .28 1.12 2.87 (.28)
----- -------- --------- ----------- --------
Total from investment
operations..................... 3.21 .49 1.33 3.33 (.15)
----- -------- --------- ----------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.27) (.20) (.25) (.39) (.16)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.78) (.49) (.20) (.78) --
----- -------- --------- ----------- --------
Total distributions............... (1.05) (.69) (.45) (1.17) (.16)
----- -------- --------- ----------- --------
Net asset value, end of year......... $ 13.96 $ 11.80 $ 12.00 $ 14.01 $11.85
----- -------- --------- ----------- --------
----- -------- --------- ----------- --------
TOTAL RETURN(c):..................... 28.24% 4.05% 12.49% 29.39% (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $ 7,023 $ 3,525 $ 3,046 $ 129,459 $4,015
Average net assets (000)............. $ 4,790 $ 2,444 $ 920 $ 99,391 $4,217
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.92% 1.95% 2.04%(b) .92% .95%(b)
Expenses, excluding distribution
fees........................... .92% .95% 1.04%(b) .92% .95%(b)
Net investment income............. 2.09% 1.78% 2.20%(b) 3.12% 2.72%(b)
</TABLE>
- ---------------
(a) Commencement of offering of Class C 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) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
+See page 12
See Notes to Financial Statements.
B-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL BALANCED FUND+
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Balanced Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Prudential
Balanced Fund (formerly Prudential Allocation Fund-Balanced Portfolio)
(the "Fund") at July 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the year then ended,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at July 31, 1997 by correspondence with the custodian and brokers,
provides a reasonable basis for the opinion expressed above. The accompanying
statement of changes in net assets for the year ended July 31, 1996 and
financial highlights for each of the periods other than the year ended July 31,
1997 were audited by other independent accountants, whose opinion dated
September 16, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
September 23, 1997
B-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF PRUDENTIAL BALANCED FUND:
We have audited the accompanying statement of changes in net assets of
Prudential Balanced Fund (formerly Prudential Allocation Fund) for the year
ended July 31, 1996, and the financial highlights contained in the prospectus
for each of the periods presented in the four years ended July 31, 1996. 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 statement 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. 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 statement and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of Prudential Balanced Fund for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
September 16, 1996
B-51
<PAGE>
APPENDIX I--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.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
VALUE OF $1.00 INVESTED ON 1/1/26 THROUGH 12/31/96/
<TABLE>
<S> <C>
SMALL STOCKS $4,495.99
COMMON STOCKS $1,370.95
LONG-TERM
BONDS $ 33.73
TREASURY BILLS $ 13.54
INFLATION $ 8.87
</TABLE>
Source: Stocks, Bonds, Bills and Inflation. 1997 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices are
usually more volatile than bond prices over the long-term. Small stock returns
for 1926-1980 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 measured using a constant one bond
portfolio with a maturity of roughly 20 years. 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).
I-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
through 1996. 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>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
- ----------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
- ----------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
- ----------------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
- ----------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7
</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 Standard & Poor's or Fitch
Investors Service). All bonds in the 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.
I-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from June 30, 1987 through June 30, 1997. It does not represent the
performance of any Prudential Mutual Fund.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Hong Kong 19.9%
Netherlands 17.2%
Sweden 17.1%
Switzerland 16.8%
Denmark 15.7%
United
States 15.0%
Belgium 13.9%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) based on data retrieved from
Lipper Analytical New Application (LANA) as of 6/30/97. 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.
[CHART]
<TABLE>
<S> <C>
Capital Appreciation
and Reinvesting
Dividends $ 228,416
Capital Appreciation
Only $ 80,463
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1997 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.
---------------------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
World Total: $12.4 Trillion
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. 45.5%
Pacific
Basin 22.6%
Europe 29.5%
Canada 2.4%
</TABLE>
Source: Morgan Stanley Capital International, June 30, 1997. 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 1579 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.
I-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
[CHART]
- ------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1997 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 1926-1996. 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.
I-4
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
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.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which 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,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and 6,400
financial advisors. 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 uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 50 million people worldwide.
Long one of the largest issuers of individual life insurance, the Prudential has
22 million life insurance policies in force today with a face value of $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.6 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1996, Prudential had more than $332 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $190 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents and more than 1,100 offices across the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of June 30, 1997, Prudential Investments Fund Management is the fifteenth
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ------------------------
(1) Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercutor Asset
Management LP as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. and BlackRock Financial Management, Inc. as
the subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1995.
III-1
<PAGE>
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.
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
- ------------------------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage Funds.
(6) As of December 31, 1994.
III-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------------------
(7) As of December 31, 1994.
(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) The following financial statements are included in the Prospectus
constituting Part A of this Registration Statement:
Financial Highlights.
(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Registration Statement:
Portfolio of Investments at July 31, 1997.
Statement of Assets and Liabilities at July 31, 1997.
Statement of Operations for the year ended July 31, 1997.
Statement of Changes in Net Assets for the years ended July 31, 1997
and 1996.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
Independent Auditors' Report.
(B) EXHIBITS:
1. (a) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Amended Certificate of Designation.*
(c) Certificate of Amendment of Declaration of Trust.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A filed via EDGAR on September 29, 1994 (File No.
33-12531).
4. Specimen receipt for shares of beneficial interest issued by the
Registrant.*
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 6(a) to the Registration Statement on Form N-14 filed via EDGAR
on April 14, 1997 (File No. 333-25133).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 6(b) to the Registration Statement on Form
N-14 filed via EDGAR on April 14, 1997 (File No. 333-25133).
6. Restated Distribution Agreement. Incorporated by reference to
Exhibit No. 6 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A filed via EDGAR on September 27, 1996 (File
No. 33-12531).
8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 9(a) to
the Registration Statement on Form N-14 filed via EDGAR on April 14,
1997 (File No. 333-25133).
C-1
<PAGE>
(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 9(b) to the Registration Statement on Form N-14 filed
via EDGAR on April 14, 1997 (File No. 333-25133).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Opinion of Counsel.*
11. (a) Consent of Independent Accountants.*
(b) Consent of Deloitte & Touche LLP.*
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
16. Schedule of Computation of Performance Quotations.*
17. Financial Data Schedules.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A filed via EDGAR on September 27, 1996 (File No. 33-12531).
- --------------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of September 12, 1997, there were 58,392, 71,463, 1,126 and 910 record
holders of Class A, Class B, Class C and Class Z shares, respectively, of
beneficial interest of the Registrant.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940,
as amended (the "1940 Act") and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, Trustees, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, trustee, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the
Distribution Agreement (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended ("Securities Act") may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1940 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issue.
C-2
<PAGE>
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC ("PIFM") and The Prudential Investment Corporation ("PIC"),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17 (h) and 17 (i) of such Act
remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC.
See "How the Fund is Managed -- Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the executive officers of PMF are
listed in Schedules A and D of Form ADV of PMF as currently on file with the
Securities and Exchange Commission, the text of which is hereby incorporated by
reference (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, President, President, Prudential Mutual Funds & Annuities
Chief Executive Officer and (PMF&A); Officer-in-Charge, President, Chief
Chief Operating Officer Executive Officer and Chief Operating Officer,
PIFM
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A;
Secretary and General Counsel Executive Vice President, Secretary and General
Counsel, PIFM
Robert F. Gunia Executive Vice President and Comptroller, Prudential Investments; Executive
Treasurer Vice President and Treasurer, PIFM; Senior Vice
President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of
Marketing, PMF&A; Executive Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice
President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed -- Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-3
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments
President and Chief Executive of The Prudential Insurance Company of America
Officer and Director (Prudential)
Jonathan M. Greene Senior Vice President and President--Investment Management of Prudential
Director Investments of Prudential; Senior Vice President
and Director, PIC
John R. Strangfeld Vice President and Director President of Private Asset Management Group of
Prudential; Senior Vice President, Prudential;
Vice President and Director, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity
Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential Institutional Liquidity
Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
International Bond Fund, Inc., Prudential Jennison Series Fund, Inc., Prudential
MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential
Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Small-Cap
Quantum Fund, Inc., Prudential Small Company Value Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential Tax-Free Money Fund, Inc., Prudential Utility Fund, Inc., Prudential
World Fund, Inc. and The Target Portfolio Trust. Prudential Securities is also a
depositor for the following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- --------------
<S> <C> <C>
Alan D. Hogan...................... Executive Vice President and Director None
George A. Murray................... Executive Vice President and Director None
Leland B. Paton.................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff.................. Executive Vice President, Chief Financial None
Officer and Director
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- --------------
<S> <C> <C>
Vincent T. Pica II................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons................... Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr................. Executive Vice President, General Counsel None
Secretary, and Director
Brian Storms....................... Director None
Gateway Center Three
Newark, NJ 07102
- --------------
(1) The address of each person named is One Seaport Plaza, New York, New York 10292 unless
otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102 the Registrant, Gateway Center Three,
Newark, New Jersey 07102 and Prudential Mutual Fund Services LLC, Raritan Plaza
One, Edison, New Jersey 08837. Documents required by Rules 31a-1 (b)(5), (6),
(7), (9), (10) and (11) and 31a-1(f) will be kept at Gateway Center Three,
Newark, New Jersey 07102. Documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at Gateway Center Three and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed --
Manager" and "How the Fund is Managed -- Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark, and
the State of New Jersey, on the 26th day of September, 1997.
PRUDENTIAL BALANCED FUND
/s/ Richard A. Redeker
-----------------------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- --------------------
<S> <C> <C>
/s/ Edward D. Beach Trustee September 26, 1997
- ---------------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Trustee September 26, 1997
- ---------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Trustee September 26, 1997
- ---------------------------------
ROBERT F. GUNIA
/s/ Donald D. Lennox Trustee September 26, 1997
- ---------------------------------
DONALD D. LENNOX
/s/ Douglas H. McCorkindale Trustee September 26, 1997
- ---------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Trustee September 26, 1997
- ---------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee September 26, 1997
- ---------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Trustee September 26, 1997
- ---------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redecker President and Trustee September 26, 1997
- ---------------------------------
RICHARD A. REDECKER
/s/ Robin B. Smith Trustee September 26, 1997
- ---------------------------------
ROBIN B. SMITH
/s/ Louis A. Weil, III Trustee September 26, 1997
- ---------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Trustee September 26, 1997
- ---------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal Financial September 26, 1997
- --------------------------------- and Accounting Officer
GRACE C. TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------------------------------------------------------------------------- ----
<C> <S> <C>
1. (a) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on September
29, 1994 (File No. 33-12531).
(b) Amended Certificate of Designation.*
(c) Certificate of Amendment of Declaration of Trust.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A filed via EDGAR on September 29, 1994 (File No.
33-12531).
4. Specimen receipt for shares of beneficial interest issued by the
Registrant.*
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 6(a) to the Registration Statement on Form N-14 filed via EDGAR
on April 14, 1997 (File No. 333-25133).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 6(b) to the Registration Statement on Form
N-14 filed via EDGAR on April 14, 1997 (File No. 333-25133).
6. Restated Distribution Agreement. Incorporated by reference to
Exhibit No. 6 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A filed via EDGAR on September 27, 1996 (File
No. 33-12531).
8. (a) Custodian Contract betwen the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 9(a) to
the Registration Statement on Form N-14 filed via EDGAR on April 14,
1997 (File No. 333-25133).
(b) Amendment to Custodian Contract. Incorporated by reference to
Exhibit No. 9(b) to the Registration Statement on Form N-14 filed
via EDGAR on April 14, 1997 (File No. 333-25133).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Opinion of Counsel.*
11. (a) Consent of Independent Accountants.*
(b) Consent of Deloitte & Touche LLP.*
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed via EDGAR on
September 29, 1994 (File No. 33-12531).
16. Schedule of Computation of Performance Quotations.*
17. Financial Data Schedules.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A filed via EDGAR on September 27, 1996 (File No. 33-12531).
<FN>
- ------------------------
* Filed herewith
</TABLE>
<PAGE>
AMENDED CERTIFICATE OF DESIGNATION
PRUDENTIAL ALLOCATION FUND
The undersigned, being the Assistant Secretary of Prudential Allocation
Fund (hereinafter referred to as the "Trust"), a trust with transferable shares
of the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY
that, pursuant to the authority conferred upon the Trustees of the Trust by
Section 6.9 and Section 9.3 of the Declaration of Trust dated February 23, 1987,
and amended and restated by an Amended and Restated Declaration of Trust dated
August 16, 1994, as amended to date (referred to as the "Declaration of Trust"),
and pursuant to rights granted to the Shareholders of the Trust by Section 9.3
of the Declaration of Trust, and by the affirmative vote of a majority of the
Trustees at a meeting duly called and held on February 19, 1997, and the
affirmative vote of a majority of the Shares of the Strategy Portfolio of the
Trust, duly cast at a meeting duly called and held on July 18, 1997, the Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest, $.01 Par Value, dated November 16, 1990 and filed with the Secretary
of The Commonwealth of Massachusetts on November 27, 1990, the Certificate of
Designation dated January 11, 1990 and filed with the Secretary of The
Commonwealth of Massachusetts on January 18, 1990, the Amended and Restated
Certificate of Designation dated July 27, 1994 and filed with the Secretary of
The Commonwealth of Massachusetts on July 28, 1994, the Amended and Restated
Certificate of Designation dated July 19, 1995 and filed with the Secretary of
The Commonwealth of Massachusetts on July 20, 1995, the Amended Certificate of
Designation dated February 12, 1996 and filed with the Secretary of The
Commonwealth of Massachusetts on February 14, 1996 and the Amended Certificate
of Designation dated June 18, 1996 and filed
<PAGE>
with the Secretary of The Commonwealth of Massachusetts on June 20, 1996
amending the Declaration of Trust are amended and restated effective as of
July 25, 1997, as follows:
The Strategy Portfolio heretofore established is hereby terminated and the
shares of beneficial interest of the Trust shall henceforth comprise a single
series, comprised of four classes, designated "Class A Shares," "Class B
Shares," "Class C Shares" and "Class Z Shares." An unlimited number of Shares
of each such class may be issued.
(1) The Shares of the several classes shall have the relative rights and
powers set forth herein and in the Declaration of Trust.
(2) The Shares of each Class of the Trust shall represent an equal
proportionate interest in the share of such class in the Trust Property,
adjusted for any liabilities specifically allocable to the Shares of that class,
and each Share of any such class shall have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
expenses related directly or indirectly to the distribution of the Shares of a
class, and any service fees to which such class is subject (as determined by the
Trustees), shall be borne solely by such class, and such expenses shall be
appropriately reflected in the determination of net asset value and the
dividend, distribution and liquidation rights of such class.
(3) (a) Class A Shares shall be subject to (i) a front-end sales charge
and (ii) (A) an asset-based sales charge pursuant to a plan under Rule 12b-1 of
the 1940 Act (a "Plan"), and/or (B) a service fee for the maintenance of
shareholder accounts and personal services, in such amounts as shall be
determined from time to time.
(b) Class B Shares shall be subject to (i) a contingent deferred
sales charge and (ii) (A) an asset-based sales charge pursuant to a Plan, and/or
(B) a service fee for the
-2-
<PAGE>
maintenance of shareholder accounts and personal services, in such amounts as
shall be determined from time to time.
(c) Class C Shares shall be subject to (i) a contingent deferred
sales charge and (ii) (A) an asset-based sales charge pursuant to a Plan, and/or
(B) a service fee for the maintenance of shareholder accounts and personal
services, in such amounts as shall be determined from time to time.
(d) Class Z Shares shall not be subject to either an initial or
contingent deferred sales charge nor subject to any Rule 12b-1 fee.
(4) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide that holders of Shares of the Trust
shall have the right to convert said Shares into Shares of one or more other
series of registered investment companies specified for the purpose in this
Trust's Prospectus, that holders of any class of Shares of the Trust shall have
the right to convert such Shares into Shares of one or more other classes of the
Trust, and that Shares of any class of the Trust shall be automatically
converted into Shares of another class of the Trust, in each case in accordance
with such requirements and procedures as the Trustees may from time to time
establish. The requirements and procedures applicable to such mandatory or
optional conversion of Shares of any such class shall be set forth in the
Prospectus in effect with respect to such Shares.
(5) Shareholders of each class shall vote as a separate class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to any class as provided in, Rule 18f-2, as
from time to time in effect, under the 1940 Act, or any successor rule and by
the Declaration of Trust. Except as otherwise required by the 1940 Act, the
Shareholders of each class, voting as a separate class, shall have sole and
exclusive
-3-
<PAGE>
voting rights with respect to the provisions of any Plan applicable to Shares of
such class, and shall have no voting rights with respect to provisions of any
Plan applicable solely to any other class of Shares of the Trust.
(6) If additional series are created, the assets and liabilities of the
Trust shall be allocated among the several series as set forth in Section 6.9 of
the Declaration of Trust, except that the liabilities, expenses, costs, charges
or reserves of the Trust (other than the investment advisory fee or the
organization expenses paid by the Trust) which are not readily identifiable as
belonging to any particular series shall be allocated among the several series
on the basis of their relative average daily net assets.
(7) The Trustees (including any successor Trustees) shall have the right
at any time and from time to time to reallocate assets and expenses or to change
the designation of the series now existing or any series hereafter created, or
otherwise to change the special and relative rights of any such series provided
that such change shall not adversely affect the rights of holders of shares of a
series. IN WITNESS WHEREOF, the undersigned has set her hand and seal this 23rd
day of July, 1997.
/s/ Marguerite E. H. Morrison
------------------------------------
Marguerite E. H. Morrison,
Assistant Secretary
-4-
<PAGE>
ACKNOWLEDGMENT
STATE OF NEW JERSEY )
) SS July 23, 1997
COUNTY OF NEWARK )
Then personally appeared before me the above named Marguerite E. H.
Morrison, Assistant Secretary, and acknowledged the foregoing instrument to be
her free act and deed.
/s/ S. Jane Rose
-------------------------------------
Notary Public
-5-
<PAGE>
PRUDENTIAL ALLOCATION FUND
Certificate of Amendment of
Declaration of Trust
The undersigned, being the duly elected and acting Assistant Secretary of
PRUDENTIAL ALLOCATION FUND, a trust with transferable shares under Massachusetts
law (the "Trust"), established under a Declaration of Trust dated February 23,
1987, and amended and restated by an Amended and Restated Declaration of Trust
dated August 16, 1994 (as so amended and restated, the "Declaration"), DO HEREBY
CERTIFY that the Trustees of the Trust, acting pursuant to Section 9.3 of the
Declaration, by vote duly adopted at a meeting of the Trustees, duly called and
held, at which a quorum was present and acting, have amended Section 1.1 of the
Declaration to read as follows:
"SECTION 1.1. NAME. The name of the trust created
hereby is the Prudential Balanced Fund."
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Trust,
this 22nd day of July, 1997.
/s/ Marguerite E. H. Morrison
--------------------------------------
Name: Marguerite E. H. Morrison
Title: Assistant Secretary
[TRUST SEAL]
<PAGE>
STATE OF NEW JERSEY )
) ss.:
COUNTY OF NEWARK )
Then personally appeared the above named Marguerite E. H. Morrison,
Assistant Secretary, who acknowledged the foregoing instrument to be her free
act and deed, this 22nd day of July, 1997.
Before me
/s/ S. Jane Rose
------------------------------------
Notary Public
My Commission Expires
--------------
[NOTARIAL SEAL]
<PAGE>
CLASS
RECEIPT FOR SHARES
NUMBER SHARES OF BENEFICIAL INTEREST
PRUDENTIAL BALANCED FUND
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS
ACCOUNT NO. ALPHA CODE CUSIP
see reverse side
for certain definitions
THIS IS TO EVIDENCE THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST PAR VALUE OF $.01
EACH OF THE
------------------------- PRUDENTIAL BALANCED FUND --------------------------
hereafter called the "Trust", transferable on the books of the Trust by the
owner in person or by duly authorized attorney upon surrender of the Certificate
properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to the provisions of the Declaration of Trust and By-Laws of
the Trust and all amendments thereof, copies of which are on file with the
Secretary of the Commonwealth of Massachusetts and at the office of the
Trust, to all of which the holder by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF the Trust has caused this Certificate to be signed in
its name by its proper officers and to be sealed with the Seal of the Trust.
[SEAL]
PRUDENTIAL BALANCED FUND
COMMONWEALTH OF
1987
MASSACHUSETTS
*
Dated:
/s/ S Jane Rose /s/ Lawrence C McQuade
Secretary President
COUNTERSIGNED
PRUDENTIAL MUTUAL FUND SERVICES LLC
By: TRANSFER AGENT
AUTHORIZED OFFICER
<PAGE>
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT-. . . Custodian . . .
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right under Uniform Gifts
of survivorship and not as to Minors Act
tenants in common. -----------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received,. . . . . . . . . . .hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
/ / . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Please print or typewrite name and address
including postal zip code of assignee
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares
of Beneficial Interest represented by the within Certificate, and do hereby
irrevocably constitute and appoint . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Attorney to transfer the said shares on the books of the within-named Trust with
full power of substitution in the premises.
Dated, . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
BETWEEN
PRUDENTIAL-BACHE FLEXIFUND
(A MASSACHUSETTS BUSINESS TRUST)
AND
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Article 1 Terms of Appointment; Duties of the Agent . . . . . . . . . 1
Article 2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . 4
Article 3 Representations and Warranties of the Agent. . . . . . . . . 5
Article 4 Representations of Warranties of the Fund. . . . . . . . . . 5
Article 5 Duty of Care and Indemnification . . . . . . . . . . . . . . 6
Article 6 Documents and Covenants of the Fund and the Agent. . . . . . 8
Article 7 Termination of Agreement . . . . . . . . . . . . . . . . . . 10
Article 8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . 10
Article 9 Affiliations . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 10 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 11 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . 12
Article 12 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 12
Article 13 Merger of Agreement. . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1988 by and between
PRUDENTIAL-BACHE FLEXIFUND, a Massachusetts business trust, having its principal
office and place of business at One Seaport Plaza, New York, New York 10292 (the
"Fund"), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation,
having its principal office and place of business at Raritan Plaza I, Edison,
New Jersey 08818 (the "Agent" or "PMFS").
WHEREAS, the Fund desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 TERMS OF APPOINTMENT; DUTIES OF PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series of the Fund, $.01 par value ("Shares"), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof ("Shareholders") and set out in the currently
effective prospectus and statement of additional information ("prospectus") of
the Fund, including without limitation any periodic investment plan or periodic
withdrawal program.
-1-
<PAGE>
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time
by agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation therefor to the
Custodian of the Fund authorized pursuant to the Declaration of Trust of the
Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay over or cause to be
paid over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such charges may be
reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
-2-
<PAGE>
(ix) Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934
Act") a record of the total number of Shares of the Fund which are authorized,
based upon data provided to it by the Fund, and issued and outstanding. PMFS
shall also provide to the Fund on a regular basis the total number of Shares
which are authorized, issued and outstanding. When recording the issuance of
Shares, PMFS shall have no obligation to take cognizance of any Blue Sky laws
relating to the issue or sale of such Shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), PMFS shall: (i) perform all of the customary
services of a transfer agent, dividend disbursing agent and, as relevant,
shareholder servicing agent in connection with accumulation, open-account or
similar plans (including without limitation any periodic investment plan or
periodic withdrawal program), including but not limited to, maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder reports and
prospectuses to current Shareholders, withholding taxes on non-resident alien
accounts, preparing and filing appropriate forms required with respect to
dividends and distributions by federal tax authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, preparing and mailing
activity statements for Shareholders and providing Shareholder account
information and (ii) provide a system which will enable the Fund to monitor
the total number of Shares sold in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing
-3-
<PAGE>
those transactions and assets to be treated as exempt from Blue Sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of PMFS for the Fund's registration status under
the Blue Sky or securities laws of any State or other jurisdiction is solely
limited to the initial establishment of transactions subject to Blue Sky
compliance by the Fund and the reporting of such transactions to the Fund as
provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.
Article 2 FEES AND EXPENSES
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the
Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by
PMFS for the items set out in Schedule A attached hereto. In addition, any
other expenses incurred by PMFS at the request or with the consent of the Fund
will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
-4-
<PAGE>
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund
upon request prior to the mailing date of such materials.
Article 3 REPRESENTATIONS AND WARRANTIES OF PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in
good standing under the laws of New Jersey and it is duly qualified to carry
on its business in New Jersey.
3.02 It is and will remain registered with the U.S.
Securities and Exchange Commission ("SEC") as a Transfer Agent pursuant to
the requirements of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter
and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations
under this Agreement.
Article 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and
in good standing under the laws of the Commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and by its
Declaration of Trust and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration of
Trust and By-Laws have been taken to authorize it to enter into and perform
-5-
<PAGE>
this Agreement.
4.04 It is an investment company registered with the SEC
under the Investment Company Act of 1940, as amended (the "1940 Act").
4.05 A registration statement under the Securities Act of
1933 (the "1933 Act") is currently effective and will remain effective, and
appropriate State securities law filings have been made and will continue to
be made, with respect to all Shares of the Fund being offered for sale.
Article 5 DUTY OF CARE AND INDEMNIFICATION
5.01 PMFS shall not be responsible for, and the Fund shall
indemnify and hold PMFS harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability
arising out of or attributable to:
(a) All actions of PMFS or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions
are taken in good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms
of this Agreement, or which arise out of the Fund's lack of good faith,
negligence or willful misconduct or which arise out of the breach of any
representation or warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or
subcontractors of information, records and documents which (i) are received
by PMFS or its agents or subcontractors and furnished to it by or on behalf
of the Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its
agents or subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
requirement under
-6-
<PAGE>
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. PMFS, its agents and subcontractors shall also be
protected and indemnified in recognizing share certificates which are reasonably
believed to bear the proper manual or facsimile signature of the officers of the
Fund, and the proper countersignature of any former transfer
-7-
<PAGE>
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment or transmission failure or damage reasonably beyond its
control, or other causes reasonably beyond its control, such party shall not
be liable for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement
or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion, and
shall keep the other party advised with respect to all developments
concerning such claim. The party who may be required to indemnify shall have
the option to participate with the party seeking indemnification in the
defense of such claim. The party seeking indemnification shall in no case
confess any claim or make any compromise in any case in which the other party
may be required to indemnify it except with the other party's prior written
consent.
Article 6 DOCUMENTS AND COVENANTS OF THE FUND AND PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Trustees of
the Fund authorizing the appointment of PMFS and the execution and delivery
of this Agreement;
(b) A certified copy of the Declaration of Trust and By-Laws
of the Fund and all amendments thereto;
-8-
<PAGE>
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the
form approved by the Trustees with a certificate of the Secretary of the Fund as
to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent
deems to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 PMFS shall prepare and keep records relating to the services
to be performed hereunder, in the form and manner as it may deem advisable. To
the extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its
request.
6.04 PMFS and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
-9-
<PAGE>
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 7 TERMINATION OF AGREEMENT
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right
to charge for any other reasonable fees and expenses associated with such
termination.
Article 8 ASSIGNMENT
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent
by the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a
-10-
<PAGE>
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered
broker-dealer, (iv) any Prudential-Bache or Prudential subsidiary or
affiliate duly registered as a broker-dealer and/or a transfer agent
pursuant to the 1934 Act or (vi) any other Prudential-Bache or Prudential
affiliate or subsidiary; provided, however, that PMFS shall be as fully
responsible to the Fund for the acts and omissions of any agent or
subcontractor as it is for its own acts and omissions.
Article 9 AFFILIATIONS
9.01 PMFS may now or hereafter, without the consent of or notice
to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for
any other investment company registered with the SEC under the 1940 Act,
including without limitation any investment company whose adviser,
administrator, sponsor or principal underwriter is or may become affiliated with
Prudential-Bache and/or Prudential or any of its or their direct or indirect
subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
Article 10 AMENDMENT
10.01 This Agreement may be amended or modified by a written
-11-
<PAGE>
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 APPLICABLE LAW
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 MISCELLANEOUS
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of
money on the account of any Shareholder or new investor is returned unpaid for
any reason, PMFS will (a) give prompt notification to the Fund's distributor
("Distributor") of such non-payment; and (b) take such other action, including
imposition of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Fund and the Distributor may instruct
PMFS.
12.03 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to PMFS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
-12-
<PAGE>
writing.
To the Fund;
Prudential-Bache FlexiFund
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President
12.04 All references to actions of or by Trustees herein shall
require action by such Trustees acting as a board or a formally constituted
group and not individually. The name "Prudential-Bache FlexiFund" is the
designation of the Trustees under the Declaration of Trust, and all persons
dealing with the Fund must look solely to the Fund for the enforcement of any
claims against the Fund as none of the Trustees, officers, agents or
Shareholders assume any personal responsibility for obligations entered into on
behalf of the Fund.
Article 13 MERGER OF AGREEMENT
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
-13-
<PAGE>
PRUDENTIAL-BACHE FLEXIFUND
BY: /s/ Michael J. Downey
-------------------------------
ATTEST:
/s/ S. Jane Rose
- -----------------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Fred A. Fiandaca
-------------------------------
ATTEST:
/s/ Lynda M. Puglisi
- -----------------------------------
-14-
<PAGE>
SCHEDULE A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE FLEXIFUND
(CONSERVATIVE)
GENERAL - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.
ANNUAL MAINTENANCE CHARGES - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 10.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
INACTIVE ACCOUNT FEE - $.20 per month. A monthly fee is charged for inactive
accounts with a zero balance.
OUT-OF-POCKET EXPENSES - Out-of-Pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
PAYMENT - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE FLEXIFUND PRUDENTIAL MUTUAL FUND
(CONSERVATIVE) SERVICES, INC.
NAME: /s/ Susan C. Cote NAME: /s/ Robert F. Gunia
--------------------------- -----------------------------------
TITLE: Treasurer TITLE: Executive Vice President
-------------------------- -----------------------------------
DATE: January 1, 1990 DATE: January 1, 1990
-------------------------- -----------------------------------
<PAGE>
GASTON SNOW & ELY BARTLETT
Counsellors at Law
One Federal Street
Boston, Massachusetts 02110
617-426-4600
August 21, 1987
The Trustees
Prudential-Bache FlexiFund
One Seaport Plaza
New York, NY 10292
Gentlemen:
Prudential-Bache FlexiFund (the "Trust") is a trust created under a written
Declaration of Trust dated and executed on February 23, 1987, under the laws of
Massachusetts (the "Trust Agreement"). The Trustees have the powers set forth
in the Trust Agreement, subject to the terms, provisions and conditions therein
provided. We have acted as counsel for the Trust with respect to the
organization of the Trust, and in such capacity we are furnishing you this
opinion.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such certificates, records and other documents as we have
deemed necessary or appropriate for the purpose of this opinion, including the
Trust Agreement. Copies of the Trust Agreement have been duly filed with the
Secretary of the Commonwealth and the City Clerk of the City of Boston.
Under Article VI, Section 6.1 of the Trust Agreement, the beneficial
interest in the Trust is represented by an unlimited number of transferable
shares, with $.01 par value per share. Under Article VI, Section 6.4, the
Trustees are empowered in their discretion to issue shares of beneficial
interest to such party or parties and for such amount and type of consideration,
including cash or property, at such time or times and on such terms as the
Trustees may deem best.
Based on the foregoing, and with respect to Massachusetts law (other than
the Massachusetts Uniform Securities Act) only, to the extent that Massachusetts
law may be applicable and without reference to the laws of the other several
states or of the United States of America, we are of the opinion that, under
existing law:
1. The Trust is a trust with transferable shares of beneficial interest,
organized in compliance with the laws of the Commonwealth of Massachusetts and
the Trust Agreement is legal and valid.
<PAGE>
2. Shares of beneficial interest of the Trust may be legally and validly
issued from time to time in accordance with the Trust Agreement upon receipt by
the Trust of payment in compliance with Article VI, Section 6.4 of the Trust
Agreement. We are further of the opinion that such shares when so issued will
be fully paid and nonassessable by the Trust.
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to an amendment to your registration statement on Form
N-1A under the Investment Company Act of 1940 and the Securities Act of 1933.
Very truly yours,
/s/ Gaston Snow & Ely Bartlett
<PAGE>
Exhibit 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 19 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
September 23, 1997, relating to the financial statements and financial
highlights of Prudential Balanced Fund, which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
September 24, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment NO. 19 to Registration
Statement No. 33-12531 of Prudential Balanced Fund (formerly the Prudential
Allocation Fund) of our report dated September 16, 1996, appearing in the
Statement of Additional Information, which is included in such Registration
Statement, and to the reference to us under the heading "Financial Highlights"
in the Prospectus, which is also included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
September 25, 1997
<PAGE>
Exhibit 16
PRUDENTIAL BALANCED FUND
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
P (1+T) = ERV
Where: P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years
ERV = ending redeemable value.
- --------------------------------------------------------------------------------
One Year ended July 31, 1997
----------------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
P = $1,000 $1,000 $1,000 $1,000
ERV = $1,226 $1,232 $1,272 $1,294
n = 1.0 1.0 1.0 1.0
T = 22.63% 23.24% 27.24% 29.39%
Five Years ended Since inception to
July 31, 1997 July 31, 1997
----------------------- ---------------------
Class A Class B Class C Class Z
------- ------- ------- -------
P = $1,000 $1,000 $1,000 $1,000
ERV = $23,105 $25,429 $15,010 $12,779
n = 5.0 5.0 3.0 1.5
T = 11.51% 11.68% 14.51% 18.91%
<PAGE>
Exhibit 16
PRUDENTIAL BALANCED FUND
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = ---------
P
Where: P = hypothetical initial payment of $1,000.
ERV = ending redeemable value.
T = Aggregate total return.
- --------------------------------------------------------------------------------
One Year ended July 31, 1997
----------------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
P = $1,000 $1,000 $1,000 $1,000
ERV = $1,291 $1,282 $1,282 $1,294
T = 29.09% 28.24% 28.24% 29.39%
Five Years ended Since inception to
July 31, 1997 July 31, 1997
---------------------- ----------------------
Class A Class B Class C Class Z
------- ------- ------- -------
P = $1,000 $1,000 $1,000 $1,000
ERV = $1,127 $1,118 $1,145 $1,189
T = 12.66% 11.81% 14.51% 18.91%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> THE PRUDENTIAL BALANCED FUND
<SERIES>
<NUMBER> 001
<NAME>THE PRUDENTIAL BALANCED FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 1,045,720,758
<INVESTMENTS-AT-VALUE> 1,226,264,118
<RECEIVABLES> 90,429,226
<ASSETS-OTHER> 7,910,687
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,324,604,031
<PAYABLE-FOR-SECURITIES> 59,272,776
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,673,698
<TOTAL-LIABILITIES> 64,946,474
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,002,112,562
<SHARES-COMMON-STOCK> 90,069,241
<SHARES-COMMON-PRIOR> 58,376,266
<ACCUMULATED-NII-CURRENT> 1,986,876
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 75,014,815
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 180,543,304
<NET-ASSETS> 1,259,657,557
<DIVIDEND-INCOME> 7,099,330
<INTEREST-INCOME> 26,672,785
<OTHER-INCOME> 0
<EXPENSES-NET> 12,837,355
<NET-INVESTMENT-INCOME> 20,934,760
<REALIZED-GAINS-CURRENT> 92,822,065
<APPREC-INCREASE-CURRENT> 97,850,789
<NET-CHANGE-FROM-OPS> 211,607,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,301,229)
<DISTRIBUTIONS-OF-GAINS> (50,703,488)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 583,212,616
<NUMBER-OF-SHARES-REDEEMED> (220,143,556)
<SHARES-REINVESTED> 65,884,101
<NET-CHANGE-IN-ASSETS> 569,556,058
<ACCUMULATED-NII-PRIOR> 3,473,368
<ACCUMULATED-GAINS-PRIOR> 32,801,020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,475,097
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,837,355
<AVERAGE-NET-ASSETS> 306,717,000
<PER-SHARE-NAV-BEGIN> 11.85
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 2.96
<PER-SHARE-DIVIDEND> (0.36)
<PER-SHARE-DISTRIBUTIONS> (0.78)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.01
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> THE PRUDENTIAL BALANCED FUND
<SERIES>
<NUMBER> 002
<NAME> THE PRUDENTIAL BLANCED FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 1,045,720,758
<INVESTMENTS-AT-VALUE> 1,226,264,118
<RECEIVABLES> 90,429,226
<ASSETS-OTHER> 7,910,687
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,324,604,031
<PAYABLE-FOR-SECURITIES> 59,272,776
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,673,698
<TOTAL-LIABILITIES> 64,946,474
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,002,112,562
<SHARES-COMMON-STOCK> 90,069,241
<SHARES-COMMON-PRIOR> 58,376,266
<ACCUMULATED-NII-CURRENT> 1,986,876
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 75,014,815
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 1,259,657,557
<DIVIDEND-INCOME> 7,099,330
<INTEREST-INCOME> 26,672,785
<OTHER-INCOME> 0
<EXPENSES-NET> 12,837,355
<NET-INVESTMENT-INCOME> 20,934,760
<REALIZED-GAINS-CURRENT> 92,822,065
<APPREC-INCREASE-CURRENT> 97,850,789
<NET-CHANGE-FROM-OPS> 211,607,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,301,229)
<DISTRIBUTIONS-OF-GAINS> (50,703,488)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 583,212,616
<NUMBER-OF-SHARES-REDEEMED> (220,143,556)
<SHARES-REINVESTED> 65,884,101
<NET-CHANGE-IN-ASSETS> 569,556,058
<ACCUMULATED-NII-PRIOR> 3,473,368
<ACCUMULATED-GAINS-PRIOR> 32,801,020
<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,837,355
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<PER-SHARE-NAV-BEGIN> 11.80
<PER-SHARE-NII> 0.26
<PER-SHARE-GAIN-APPREC> 2.95
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> (0.78)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.96
<EXPENSE-RATIO> 1.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> THE PRUDENTIAL BALANCED FUND
<SERIES>
<NUMBER> 003
<NAME> THE PRUDENTIAL BALANCED FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 1,045,720,758
<INVESTMENTS-AT-VALUE> 1,226,264,118
<RECEIVABLES> 90,429,226
<ASSETS-OTHER> 7,910,687
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,324,604,031
<PAYABLE-FOR-SECURITIES> 59,272,776
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,673,698
<TOTAL-LIABILITIES> 64,946,474
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,002,112,562
<SHARES-COMMON-STOCK> 90,069,241
<SHARES-COMMON-PRIOR> 58,376,266
<ACCUMULATED-NII-CURRENT> 1,986,876
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 75,014,815
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 180,543,304
<NET-ASSETS> 1,259,657,557
<DIVIDEND-INCOME> 7,099,330
<INTEREST-INCOME> 26,672,785
<OTHER-INCOME> 0
<EXPENSES-NET> 12,837,355
<NET-INVESTMENT-INCOME> 20,934,760
<REALIZED-GAINS-CURRENT> 92,822,065
<APPREC-INCREASE-CURRENT> 97,850,789
<NET-CHANGE-FROM-OPS> 211,607,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,301,229)
<DISTRIBUTIONS-OF-GAINS> (50,703,488)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 583,212,616
<NUMBER-OF-SHARES-REDEEMED> (220,143,556)
<SHARES-REINVESTED> 65,884,101
<NET-CHANGE-IN-ASSETS> 569,556,058
<ACCUMULATED-NII-PRIOR> 3,473,368
<ACCUMULATED-GAINS-PRIOR> 32,801,020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,475,097
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,837,355
<AVERAGE-NET-ASSETS> 4,790,000
<PER-SHARE-NAV-BEGIN> 11.80
<PER-SHARE-NII> 0.26
<PER-SHARE-GAIN-APPREC> 2.95
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> (0.78)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.96
<EXPENSE-RATIO> 1.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> THE PRUDENTIAL BALANCED FUND
<SERIES>
<NUMBER> 004
<NAME> THE PRUDENTIAL BALANCED FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 1,045,720,758
<INVESTMENTS-AT-VALUE> 1,226,264,118
<RECEIVABLES> 90,429,226
<ASSETS-OTHER> 7,910,687
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,324,604,031
<PAYABLE-FOR-SECURITIES> 59,272,776
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<TOTAL-LIABILITIES> 64,946,474
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<PAID-IN-CAPITAL-COMMON> 1,002,112,562
<SHARES-COMMON-STOCK> 90,069,241
<SHARES-COMMON-PRIOR> 58,376,266
<ACCUMULATED-NII-CURRENT> 1,986,876
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 75,014,815
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 180,543,304
<NET-ASSETS> 1,259,657,557
<DIVIDEND-INCOME> 7,099,330
<INTEREST-INCOME> 26,672,785
<OTHER-INCOME> 0
<EXPENSES-NET> 12,837,355
<NET-INVESTMENT-INCOME> 20,934,760
<REALIZED-GAINS-CURRENT> 92,822,065
<APPREC-INCREASE-CURRENT> 97,850,789
<NET-CHANGE-FROM-OPS> 211,607,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,301,229)
<DISTRIBUTIONS-OF-GAINS> (50,703,488)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 583,212,616
<NUMBER-OF-SHARES-REDEEMED> (220,143,556)
<SHARES-REINVESTED> 65,884,101
<NET-CHANGE-IN-ASSETS> 569,556,058
<ACCUMULATED-NII-PRIOR> 3,473,368
<ACCUMULATED-GAINS-PRIOR> 32,801,020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,475,097
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,837,355
<AVERAGE-NET-ASSETS> 99,391,000
<PER-SHARE-NAV-BEGIN> 12
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 3
<PER-SHARE-DIVIDEND> (0)
<PER-SHARE-DISTRIBUTIONS> (1)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
