<PAGE>
As filed with the Securities and Exchange Commission on September 28, 1998
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. 20 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 22 /X/
(CHECK APPROPRIATE BOX OR BOXES)
--------------
PRUDENTIAL BALANCED 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)
/X/ on September 29, 1998 pursuant to paragraph (b)
/ / 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
Title of Securities Being Registered. . . . . . . Shares of Beneficial
Interest, $.01 par value per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
Prudential Balanced Fund
- ----------------------------------------------
- ----------------------------------------------
PROSPECTUS DATED SEPTEMBER 29, 1998
- ----------------------------------------------------------------
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 and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated September 29, 1998, 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.
The Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
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 15. 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 August 31, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $66 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 Investment Management Services LLC (the Distributor) 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 the annual
rate of 1% of the average daily net assets of each of the Class B and Class
C shares. The Distributor 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 Investment
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 36.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per
share (NAV) next determined after receipt of your purchase order by the
Transfer Agent, a Dealer or the Distributor 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 NAV without any sales charge. Dealers may
charge their customers a separate fee for handling purchase transactions.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about Class Z
shares. 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 but, for one
year after purchase, are subject to a CDSC of 1%
on redemptions. Like Class B shares, Class C
shares are subject to higher ongoing
distribution-related expenses than Class A shares
but Class C shares do not convert to another
class.
- Class Z Shares: Sold without either an initial sales charge or
CDSC 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
your Dealer, the Distributor or the Transfer Agent receives your sell order.
The proceeds of redemptions of Class B and Class C shares may be subject to
a CDSC. Dealers may charge their customers a separate fee for handling sale
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information
about selling their Class Z shares. 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..................... .29 .29 .29 .29
--- --- --- ---
Total Fund Operating Expenses
(After Reduction)................. 1.19% 1.94% 1.94% .94%
--- --- --- ---
--- --- --- ---
</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............................ $ 62 $ 86 $ 112 $ 187
Class B............................ $ 70 $ 91 $ 115 $ 198
Class C............................ $ 30 $ 61 $ 105 $ 226
Class Z............................ $ 10 $ 30 $ 52 $ 115
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................ $ 62 $ 86 $ 112 $ 187
Class B............................ $ 20 $ 61 $ 105 $ 198
Class C............................ $ 20 $ 61 $ 105 $ 226
Class Z............................ $ 10 $ 30 $ 52 $ 115
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist 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." The above example is
based on data for the Fund's fiscal year ended July 31, 1998. "Other
Expenses" includes Trustees' and professional fees, registration fees,
reports to shareholders and transfer agency and custodian (domestic and
foreign) fees.
---------------------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder
Guide--Conversion Feature--Class B Shares."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. 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% 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. This voluntary waiver may be terminated
at any time without notice. See "How the Fund is Managed--Distributor."
Total Fund Operating Expenses without such limitation would be 1.24%.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights for the two years ended July 31, 1998, have
been audited by PricewaterhouseCoopers LLP, independent accountants, and for the
three years ended July 31, 1996, have been audited by other 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
-------------------------------------------------------------------------
YEAR ENDED JULY 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75 $ 11.00 $ 10.73 $10.23
-------- -------- -------- -------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .33 .34 .31 .34 .33 .43 .44 .44
Net realized and unrealized gain (loss) on
investment transactions......................... .29 2.96 .28 1.11 (.05) 1.16 .81 .73
-------- -------- -------- -------- ------- ------- ------- ------
Total from investment operations................ .62 3.30 .59 1.45 .28 1.59 1.25 1.17
-------- -------- -------- -------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.34) (.36) (.29) (.33) (.37) (.37) (.44) (.44)
Distributions from net realized gains on
investment and foreign currency transactions.... (1.66) (.78) (.49) (.20) (.54) (.47) (.54) (.23)
-------- -------- -------- -------- ------- ------- ------- ------
Total distributions............................. (2.00) (1.14) (.78) (.53) (.91) (.84) (.98) (.67)
-------- -------- -------- -------- ------- ------- ------- ------
Net asset value, end of period.................... $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75 $ 11.00 $10.73
-------- -------- -------- -------- ------- ------- ------- ------
-------- -------- -------- -------- ------- ------- ------- ------
TOTAL RETURN (c):................................. 5.05% 29.09% 4.89% 13.67% 2.39% 15.15% 12.29% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $485,690 $497,461 $262,096 $119,829 $37,512 $22,605 $10,944 $4,408
Average net assets (000).......................... $493,828 $306,717 $246,609 $ 69,754 $29,875 $15,392 $ 7,103 $2,747
Ratios to average net assets:
Expenses, including distribution fees........... 1.19% 1.17% 1.20% 1.22% 1.23% 1.17% 1.29% 1.38%
Expenses, excluding distribution fees........... .94% .92% .95% .97% 1.00% .97% 1.09% 1.18%
Net investment income........................... 2.51% 2.84% 2.53% 2.90% 2.84% 3.88% 3.97% 4.44%
Portfolio turnover rate........................... 144% 140% 97% 201% 108% 83% 105% 137%
<CAPTION>
JANUARY 22,
1990 (a)
THROUGH
JULY 31,
1990
-----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 9.83
-----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .26
Net realized and unrealized gain (loss) on
investment transactions......................... .38
-----------
Total from investment operations................ .64
-----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.24)
Distributions from net realized gains on
investment and foreign currency transactions.... --
-----------
Total distributions............................. (.24)
-----------
Net asset value, end of period.................... $10.23
-----------
-----------
TOTAL RETURN (c):................................. 6.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,944
Average net assets (000).......................... $1,047
Ratios to average net assets:
Expenses, including distribution fees........... 1.29%(b)
Expenses, excluding distribution fees........... 1.09%(b)
Net investment income........................... 5.04%(b)
Portfolio turnover rate........................... 106%
</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 two years ended July 31, 1998, have
been audited by PricewaterhouseCoopers LLP, independent accountants, and for the
three years ended July 31, 1996, have been audited by other 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
--------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of year................. $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21 $ 9.43
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income..... .24 .26 .21 .26 .24 .34 .35 .36 .45 .52
Net realized and
unrealized gain (loss)
on investment
transactions............ .27 2.95 .28 1.10 (.05) 1.16 .82 .73 .18 .73
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.............. .51 3.21 .49 1.36 .19 1.50 1.17 1.09 .63 1.25
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.24) (.27) (.20) (.25) (.28) (.29) (.36) (.37) (.52) (.47)
Distributions from net
realized gains on
investment and foreign
currency transactions... (1.66) (.78) (.49) (.20) (.54) (.47) (.54) (.23) (.10) --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions..... (1.90) (1.05) (.69) (.45) (.82) (.76) (.90) (.60) (.62) (.47)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year.................... $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72 $ 10.98 $ 10.71 $ 10.22 $ 10.21
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN (a):......... 4.28% 28.24% 4.05% 12.79% 1.61% 14.27% 11.48% 11.13% 6.44% 13.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................... $533,354 $625,715 $420,465 $392,291 $445,609 $321,831 $225,995 $162,281 $154,917 $132,631
Average net assets
(000)................... $578,432 $431,425 $437,792 $409,419 $392,133 $267,340 $189,358 $149,907 $143,241 $139,009
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.94% 1.92% 1.95% 1.97% 2.00% 1.97% 2.09% 2.16% 2.07% 2.09%
Expenses, excluding
distribution fees...... .94% .92% .95% .97% 1.00% .97% 1.09% 1.16% 1.08% 1.08%
Net investment income... 1.76% 2.09% 1.78% 2.34% 2.08% 3.04% 3.25% 3.55% 4.42% 5.47%
Portfolio turnover rate... 144% 140% 97% 201% 108% 83% 105% 137% 106% 137%
</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. 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 two years ended July 31, 1998, have
been audited by PricewaterhouseCoopers 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 other 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
1998 1997 1996 JULY 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $13.96 $11.80 $12.00 $11.12
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .24 .26 .21 .21
Net realized and unrealized gain on investment
transactions.................................... .27 2.95 .28 1.12
------ ------ ------ ------
Total from investment operations................ .51 3.21 .49 1.33
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.24) (.27) (.20) (.25)
Distributions from net realized gains on
investment and foreign currency transactions.... (1.66) (.78) (.49) (.20)
------ ------ ------ ------
Total distributions............................. (1.90) (1.05) (.69) (.45)
------ ------ ------ ------
Net asset value, end of period.................... $12.57 $13.96 $11.80 $12.00
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (c):................................. 4.28% 28.24% 4.05% 12.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $9,201 $7,023 $3,525 $3,046
Average net assets (000).......................... $8,175 $4,790 $2,444 $ 920
Ratios to average net assets:
Expenses, including distribution fees........... 1.94% 1.92% 1.95% 2.04%(b)
Expenses, excluding distribution fees........... .94% .92% .95% 1.04%(b)
Net investment income........................... 1.76% 2.09% 1.78% 2.20%(b)
Portfolio turnover rate........................... 144% 140% 97% 201%
</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 two years ended July 31, 1998, have
been audited by PricewaterhouseCoopers LLP, independent accountants, and for the
period from March 1, 1996 through July 31, 1996, have been audited by other
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
---------------------------------------------
YEAR ENDED MARCH 1,
JULY 31, 1996 (a)
----------------------------- THROUGH
1998 1997 JULY 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 14.01 $ 11.85 $12.16
------------- ------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .37 .46 .13
Net realized and unrealized gain on investment
transactions.................................... .29 2.87 (.28)
------------- ------------- ------
Total from investment operations................ .66 3.33 (.15)
------------- ------------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.37) (.39) (.16)
Distributions from net realized gains on
investment and foreign currency transactions.... (1.66) (.78) --
------------- ------------- ------
Total distributions............................. (2.03) (1.17) (.16)
------------- ------------- ------
Net asset value, end of period.................... $ 12.64 $ 14.01 $11.85
------------- ------------- ------
------------- ------------- ------
TOTAL RETURN (b):................................. 5.37% 29.39% (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $131,671 $129,459 $4,015
Average net assets (000).......................... $128,358 $ 99,391 $4,217
Ratios to average net assets:
Expenses, including distribution fees........... .94% .92% .95%(c)
Expenses, excluding distribution fees........... .94% .92% .95%(c)
Net investment income........................... 2.76% 3.12% 2.72%(c)
Portfolio turnover rate........................... 144% 140% 97%
</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 AND EQUITY RELATED 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. In addition, the Fund
may invest in common stocks and common stock equivalents of smaller, faster
growing companies. The Fund may invest in equity related securities including
common stocks, preferred stocks, securities convertible or exchangeable for
common stocks or preferred stocks, equity investments in partnerships, joint
ventures, other forms of non-corporate investments, American Depositary Receipts
(ADRs), American Depositary Shares (ADSs) and warrants and rights exercisable
for equity securities. See "Convertible Securities" below.
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 BELOW, 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
interest of a fixed-income security, the shorter the duration of the security.
There are some situations where even the standard
10
<PAGE>
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-backed securities present certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
11
<PAGE>
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, ADRs, ADSs, 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.
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
12
<PAGE>
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 USING
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 ITS INVESTORS, MAY LOSE 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
13
<PAGE>
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. An option is covered if, as long
as the Fund is obligated under the option, it (i) owns an offsetting position in
the underlying security or (ii) segregates cash or other liquid assets in an
amount equal to or greater than its obligation under the option. Under the first
circumstance, the Fund's losses are limited because it owns the underlying
position; under the second circumstance, in the case of a written call option,
the Fund's losses are potentially unlimited. 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
14
<PAGE>
(cross hedge). Although there are no limits on the number of forward contracts
which the Fund may enter into, the Fund may not position hedge (including cross
hedges) 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 being hedged.
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 ITS
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 MARKET 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.
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 ITS
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 or 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 risk that
the counterparty may be unable to complete the transaction 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 portfolio security at a disadvantageous time, due to the need for the
Fund to maintain "cover" or to segregate liquid assets in connection with
hedging transactions. See "Investment Objective and Policies" and "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
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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 segregate cash or other liquid assets 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,
such securities; provided that if further consideration is required in
connection with the conversion or exchange, cash or other liquid assets in an
amount equal to such consideration must be segregated, 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 PIFM pursuant to an order of
the Commission.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (computed at
the time the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions. 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 excess 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
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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 Objective and
Policies--Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equivalent to at
least 100%, determined daily, of the market value of the securities loaned which
are segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. 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. As a matter
of fundamental policy, the Fund will not lend more than 33% of the value of its
total assets. The Fund may pay reasonable administration and custodial fees in
connection with a loan.
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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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, 1998, total expenses as a percentage of
average net assets were 1.19%, 1.94%, 1.94% and .94% 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. For the fiscal year ended July 31, 1998, 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, 1998, PIFM served as the manager to 67 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 $66 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. PIC's address
is Prudential Plaza, Newark, New Jersey 07102-3777. 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 Warren Spitz, Jeff Rose, CFA and Barbara Kenworthy.
Messrs. Rose and Spitz have had responsibility for the day-to-day management of
the equity portion of the Fund since July 1997 and March 1998, respectively. Mr.
Spitz is a Managing Director of PI and has been employed by PI as a portfolio
manager since 1987. He also serves as the portfolio manager of Prudential Equity
Income Fund (since 1988) and Prudential Series Fund -- Conservative Balanced
Portfolio, Equity Income Portfolio and Flexible Managed Portfolio. Mr. Rose is a
Vice President and Portfolio Manager of PI. He joined PI 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 Prudential Gibraltar Fund, a variable annuity.
Ms. Kenworthy, a Managing Director of PI, has had responsibility for the
day-to-day management of the bond portion of the Fund since July 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.
Mr. Spitz utilizes a "value" investing style in managing a portion of the
equity investments of the Fund. Value investing is a disciplined approach that
attempts to identify companies whose stock is selling at a discount from its
perceived true worth. Mr. Spitz seeks to invest in companies that, in his view,
have the potential to produce both above-average earnings and dividend growth
over the long term. He seeks to invest in securities at prices that, in his
view, are temporarily low relative to the company's
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earnings, assets, cash flow and dividends. In making his equity investments, Mr.
Rose uses a "growth" investing style. Growth investing identifies mid-sized and
large companies experiencing superior absolute and relative earnings growth.
Earnings stability and confidence in earnings forecasts are important parts of
the selection process. In considering a stock for ownership, Mr. Rose considers
price/earnings ratios relative to the market as well as the companies'
histories. In addition, he seeks companies that are experiencing some or all of
the following: high sales growth, high unit growth, improving profitability and
a strong balance sheet. These companies generally trade at high prices relative
to their current earnings. 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.
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 INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077 IS A LIMITED
LIABILITY COMPANY 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 A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated (Prudential Securities), One Seaport Plaza, New York, New York
10292, previously served as the distributor of Fund shares. 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), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor 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, Dealers or financial institutions 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 the
Distributor 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.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by Dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR 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. The Distributor has
voluntarily limited 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. This
voluntary waiver may be terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR 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
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CLASS B AND CLASS C SHARES OF THE FUND. The Class B and Class C Plans provide
for the payment to the Distributor 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. The Distributor also receives
CDSCs from certain redeeming shareholders. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended July 31, 1998, 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.
Distribution expenses attributable to the sale of Class A, Class B and 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 or 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 and other persons which 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.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has waived a portion of its distribution fee for the Class A
shares as described under "Distributor." Fee waivers and expense subsidies will
increase the Fund's total return. See "Performance Information" in the Statement
of Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive 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.
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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.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000 and expect that their systems, and those of
outside service providers, will be adapted in time for that event.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held by
the Fund.
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 generally 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.
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
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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.
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
22
<PAGE>
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 federal
long-term capital gains rate for individual shareholders for securities held
more than one year is 20% and the maximum statutory federal income tax rate for
ordinary income is 39.6%. The maximum statutory federal long-term capital gains
rate for corporate shareholders currently is 35%.
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 corporations, interest income, capital and
currency gain, 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 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 a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. With respect to non-corporate shareholders, gain or loss on
shares held more than one year will be considered in determining a holder's
adjusted net capital gain subject to a maximum statutory 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 payable on the accounts of certain shareholders who fail
to furnish their correct tax identification numbers to the IRS on 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 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 NET
LONG-TERM CAPITAL LOSSES. Dividends paid by the Fund with respect to each class
of shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount except
that each class (other than Class Z) will bear its own distribution charges,
generally resulting in
23
<PAGE>
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 per
share 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. 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 IMMEDIATELY BEFORE 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 and/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.
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
24
<PAGE>
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 Commission under
the Securities Act of 1933. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH DEALERS,
INCLUDING PRUDENTIAL SECURITIES OR 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 (in accordance with procedures established by the
Transfer Agent in connection with investors' accounts) by the Distributor, your
Dealer or the Transfer Agent 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. Payments
may be made by wire, check or through your brokerage account. 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 Investment Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from the Transfer Agent or the Distributor.
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 placement of the
order.
Dealers may charge their customers a separate fee for processing purchases and
redemptions. In addition, transactions in Fund shares may be subject to postage
and handling charges imposed by your Dealer. Any such charges are retained by
the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and 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 CDSC of 5% of the lesser of 1% Shares convert to Class A shares
the amount invested or the approximately seven years after
redemption proceeds; declines to purchase
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
and/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
26
<PAGE>
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 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.
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 NAV, 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.
27
<PAGE>
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>
The Distributor may reallow the entire sales charge to Dealers. Dealers may be
deemed to be underwriters, as that term is defined under the federal securities
laws. The Distributor reserves the right, without prior notice to any Dealer, to
suspend or eliminate Dealer concessions or commissions.
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
may pay Dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV 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 Prudential, Prudential Securities or its subsidiaries
(Prudential Securities 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 provides
administrative or recordkeeping services, 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
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray 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 Plan
28
<PAGE>
(Participating Funds). "Existing assets" also include monies invested in The
Guaranteed Interest Account (GIA), a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered 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 NAV 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 Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV 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 NAV 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 NAV by
Individual Retirement Accounts and 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
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
the Distributor or the Transfer Agent, by the following persons: (a) officers of
the Prudential Mutual Funds (including the Fund), (b) employees of the
Distributor, Prudential Securities, 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 the Distributor, 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 purchases 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.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
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.
29
<PAGE>
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 in proper form by the Transfer Agent, your Dealer or the
Distributor. 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, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons which sell Class B shares at the time of sale. 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, from its
own resources, 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 currently available for purchase by: (i)
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code, deferred compensation plans 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 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 an affiliate of the Distributor 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 an affiliate of the Distributor for whom Class Z shares of the
Prudential Mutual Funds are an available investment option; (iv) Benefit Plans
for which an affiliate of the Distributor 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); (vi) employees of Prudential or Prudential
Securities who participate in an employer-sponsored employee savings plan and
(vii) Prudential with an investment of $10 million or more. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for Class
Z shares.
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 (IN ACCORDANCE WITH
PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION WITH INVESTORS'
ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER. SEE "HOW THE
FUND VALUES ITS SHARES." In certain cases, however, redemption proceeds will be
reduced by the amount of any applicable CDSC, as described below. See
"Contingent Deferred Sales Charges" below. If you are redeeming your shares
through a Dealer, your Dealer must receive your sell order before the Fund
computes its NAV for that day (I.E., 4:15 P.M., New York time) in order to
receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
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, THE DISTRIBUTOR OR YOUR
DEALER IN ORDER FOR THE REDEMPTION
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<PAGE>
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, the
Distributor or to your Dealer.
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 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, THE DISTRIBUTOR OR YOUR DEALER OF THE
CERTIFICATE AND/OR WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD
SHARES THROUGH A DEALER, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR ACCOUNT AT YOUR DEALER UNLESS YOU INDICATE OTHERWISE. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission 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, WHICH MAY TAKE 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 investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. 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 NAV 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 CDSC 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
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<PAGE>
notify the Transfer Agent, either directly or through the Distributor or your
Dealer, 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. For more
information on the rule which disallows a loss on the sale or exchange of shares
of the Fund which are replaced, 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
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" 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 NAV 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
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<PAGE>
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 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 are: (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 (including a Roth IRA), a lump-sum or other distribution after
attaining age 59 1/2 or a periodic distribution based on life expectancy; (iii)
in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and (iv) 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 Prudential Securities 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 Transfer Agent either directly or through your Dealer, 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.
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<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans for which
Prudential provides administrative or recordkeeping services that participate in
the PruArray Plan.
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.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share NAV 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.
34
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, 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.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services 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
35
<PAGE>
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, Prusec or
another Dealer 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 NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares are an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 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 NAV.
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, 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.
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
your Dealer, you should contact your Dealer.
- AUTOMATIC INVESTMENT PLAN (AIP). Under AIP 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 brokerage account (including a Command Account). For additional
information about this service, you may contact the Distributor, your Dealer 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 your Dealer 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.
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<PAGE>
- 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."
- THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares of
certain Prudential Mutual Funds which are held in an eligible brokerage account.
This insurance protects the value of your mutual fund investment for your
beneficiaries against market downturns. The insurance benefit is based on the
difference at the time of the insured's death between the "protected value" and
the then current market value of the shares. This coverage is not available in
all states and is subject to various restrictions and limitations. For more
complete information about this program, including charges and expenses, please
contact your Prudential representative.
- 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 (732)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
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<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, 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.
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. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
A-1
<PAGE>
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2: Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: Obligations rated BB, B, CCC, CC and C are regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major 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 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with 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 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 High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income 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 Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
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 Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
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
----
<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 Objective 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 and Subsidy................................................... 20
Portfolio Transactions.................................................... 20
Custodian and Transfer and Dividend Disbursing Agent...................... 20
Year 2000................................................................. 21
HOW THE FUND VALUES ITS SHARES.............................................. 21
HOW THE FUND CALCULATES PERFORMANCE......................................... 21
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........................................ 34
How to Exchange Your Shares............................................... 35
Shareholder Services...................................................... 36
DESCRIPTION OF SECURITY RATINGS............................................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY........................................... B-1
</TABLE>
- -------------------------------------------
MF134A
Class A: 74431M-10-5
Class B: 74431M-20-4
CUSIP Nos.: Class C: 74431M-30-3
Class Z: 74431M-40-2
PRUDENTIAL
BALANCED
FUND
PROSPECTUS
September 29, 1998
www.prudential.com
------------------
[LOGO]
<PAGE>
PRUDENTIAL BALANCED FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 29, 1998
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 September 29, 1998, 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-17 19
Portfolio Transactions and Brokerage..................... B-19 20
Purchase and Redemption of Fund Shares................... B-20 25
Shareholder Investment Account........................... B-24 36
Net Asset Value.......................................... B-27 21
Taxes, Dividends and Distributions....................... B-28 22
Performance Information.................................. B-30 21
Organization and Capitalization.......................... B-32 24
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................. B-32 20
Financial Statements..................................... B-34 --
Report of Independent Accountants........................ B-49 --
Appendix I--General Investment Information............... I-1 --
Appendix II--Historical Performance Data................. II-1 --
Appendix III--Information Relating to Prudential......... III-1 --
- --------------------------------------------------------------------------------
MF134B
<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 pledge to a broker as collateral for the option, cash, other
liquid assets 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 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 or pledged 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 or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will segregate or
pledge an amount in cash or other liquid assets 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 segregated by the Fund
in cash or other liquid assets 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>
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 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
B-4
<PAGE>
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 segregate cash or other liquid assets in an
amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract (less the value of the "covering"
positions, if any). The assets segregated will be marked-to-market daily, and if
the value of the assets segregated declines, additional cash or other liquid
assets 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 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
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<PAGE>
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 market
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 segregating 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 segregate with its Custodian cash or other liquid assets equal to the
purchase price of the contract (less the amount of initial or variation margin
on deposit). 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 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
B-6
<PAGE>
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 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
B-7
<PAGE>
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 (the Commission), 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 Commission
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
Commission'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
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.
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<PAGE>
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 Commission. 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 on
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.
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
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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 Commission 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."
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.
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<PAGE>
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will mark cash or liquid assets as segregated 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, 1997 and 1998 were 140% and 144%,
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.
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.
B-11
<PAGE>
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) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (73) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; formerly 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 (59) Trustee Marketing and Management Consultant; Director of The High
Yield Income Fund, Inc.
*Robert F. Gunia (51) Trustee Vice President (since September 1997) of Prudential
Investments; Executive Vice President and Treasurer (since
December 1996) of 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.
Douglas H. McCorkindale (58) Trustee Vice Chairman (since March 1984) and President (since
September 1997) of Gannett Co. Inc. (publishing and media);
Director of Continental Airlines, Inc., Gannett Co. Inc. and
Frontier Corporation.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
*Mendel A. Melzer, CFA (38) 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 (56) 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 and The
High Yield Income Fund, Inc.; President, Director and
Treasurer of First Financial Fund, Inc. and The High Yield
Plus Fund, Inc.
Stephen P. Munn (55) 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).
*Richard A. Redeker (54) 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. and Prudential Mutual Fund Services,
Inc. 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 (58) Trustee Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1988-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.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) THE FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- --------------------------------------------------------------
<S> <C> <C>
Louis A. Weil, III (57) 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 Chief Executive
Officer 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 (59) Trustee President of National Exchange Inc. (new business development
firm) (since May 1983).
S. Jane Rose (52) 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.
Grace C. Torres (39) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and President (since March 1993) 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 (44) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments;
formerly First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996).
Marguerite E. H. Morrison (42) 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>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities, Prudential or PIFM.
** Unless otherwise stated, the address of the Trustees and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
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, Mr. Beach is scheduled to
retire on December 31, 1999.
B-14
<PAGE>
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 or the investment adviser annual compensation of $2,875 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 on the
boards of 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 a Commission 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.
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, 1998 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1997.
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 $ 2,875 None N/A $135,000(38/63)*
Delayne Dedrick Gold--Trustee $ 2,875 None N/A $135,000(38/63)*
Robert F. Gunia--Trustee+ -- None N/A None
Douglas H. McCorkindale--Trustee** $ 2,875 None N/A $ 70,000(20/35)*
Mendel A. Melzer--Trustee+ -- None N/A None
Thomas T. Mooney--Trustee** $ 2,875 None N/A $115,000(31/64)*
Stephen P. Munn--Trustee $ 2,875 None N/A $ 45,000(15/21)*
Richard A. Redeker--Trustee+ -- None N/A None
Robin B. Smith--Trustee** $ 2,875 None N/A $ 90,000(27/34)*
Louis A. Weil, III--Trustee $ 2,875 None N/A $ 90,000(26/50)*
Clay T. Whitehead--Trustee $ 2,875 None N/A $ 45,000(15/21)*
<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, 1997, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,640,
$143,909 and $139,097 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 15, 1998, 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 15, 1998, Prudential Employee Saving Pl, ATTN:
Dennis Pante, 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 6,989,890 and 2,320,255
Class Z shares of the Fund (67.3% and 22.3%, respectively).
As of September 15, 1998, Prudential Securities was record holder for other
beneficial owners of 15,553,343 Class A shares (or 40% of the outstanding Class
A shares) of the Fund, 11,446,599 Class B shares (or 27.9% of the outstanding
Class B shares) of the Fund, 254,971 Class C shares (or 33.6% of the outstanding
Class C shares) and 62,754 Class Z shares (or .60% 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.
B-15
<PAGE>
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (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 August 31, 1998, PIFM managed
and/or administered open-end and closed-end management investment companies with
assets of approximately $66 billion. According to the Investment Company
Institute, as of March 31, 1998, the Prudential Mutual Funds were the 18th
largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (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. 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, the investment adviser 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 Commission, including the preparation and printing of
the Fund's registration statements and prospectuses for such purposes, and
paying the fees and expenses of notice filings made in accordance with state
securities laws, (k) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders, (l)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business and (m) distribution
fees.
B-16
<PAGE>
The Management Agreement provides that 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 14, 1998 and by
shareholders of the Fund on February 19, 1988.
For the fiscal years ended July 31, 1998, 1997 and 1996, PIFM received
management fees of $7,857,149, $7,666,065 and $6,838,104 on behalf of the Fund.
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. Under the Subadvisory
Agreement, PI, subject to the supervision of PIFM, is responsible for managing
the assets of the Fund in accordance with its investment objectives and
policies. PI determines what securities and other instruments are purchased and
sold for the Fund and is responsible for obtaining and evaluating financial data
relevant to 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 14,
1998, 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 Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities) was the Fund's distributor.
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), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
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
B-17
<PAGE>
May 4, 1993, the Trustees, including a majority of the Rule 12b-1 Trustees, at a
meeting called for the purpose of voting on each Plan, adopted a plan of
distribution for the Class C shares of the Fund and approved further amendments
to the plans of distribution for the Fund's Class A and Class B shares, changing
them from reimbursement type plans to compensation type plans. The Plans, as
amended and restated, were approved by the Trustees, including a majority of the
Rule 12b-1 Trustees, on May 14, 1998. The Class A Plan, as previously amended,
was approved by Class A and Class B shareholders of the Fund, and the Class B
Plan, as previously 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, 1998, Prudential Securities
and PIMS received payments of $1,127,146 and $107,424, respectively, on behalf
of the Fund 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, 1998, Prudential
Securities and PIMS also received approximately $323,000 and $36,000,
respectively, on behalf of the Fund in initial sales charges.
CLASS B PLAN. For the fiscal year ended July 31, 1998, Prudential Securities
and PIMS received $5,085,419 and $698,898, respectively, from the Fund under the
Class B Plan and spent approximately $2,329,900 and $122,900, respectively, in
distributing the Fund's Class B shares. It is estimated that of the latter
amounts, approximately 1.7% ($42,700) was spent on printing and mailing of
prospectuses to other than current shareholders; 57.0% ($1,396,900) was spent on
compensation of Pruco Securities Corporation, an affiliated broker-dealer
(Prusec), for commissions to its representatives and other expenses, including
an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and 41.3% ($1,013,200) on the aggregate of (i) payments of commissions and
account servicing fees to financial advisers (36.5% or $896,300) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses (4.8% or $116,900). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities branch offices in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications 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.
The Distributor (and Prudential Securities as its predecessor) 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, 1998, Prudential Securities and PIMS received approximately $730,300
and $89,700, respectively, in contingent deferred sales charges attributable to
Class B shares.
CLASS C PLAN. For the fiscal year ended July 31, 1998, Prudential Securities
and PIMS received $69,983 and $11,769, respectively, under the Class C Plan and
spent approximately $101,900 and $10,400, respectively, in distributing Class C
shares. It is estimated that of the latter amounts, approximately .8% ($900) was
spent on printing and mailing of prospectuses to other than current
shareholders; 14.9% ($16,700) was spent on commissions paid to or on account of
representatives of Prusec and 84.3% ($94,700) on payments of commissions and
account servicing fees to financial advisers.
The Distributor (and Prudential Securities as its predecessor) 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, 1998, Prudential Securities and PIMS received approximately $4,300 and
$700, respectively, in contingent deferred sales charges attributable to Class C
shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority of the Trustees, including a majority of the
Rule 12b-1 Trustees, at a meeting called for the purpose of voting on such
continuance. A Plan may 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 of the Fund on not
more than 60 days', nor less than 30 days', written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
B-18
<PAGE>
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the 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 the
Distributor to the extent permitted by applicable law against certain
liabilities under the federal securities laws. The Distribution Agreement was
approved by the Trustees, including a majority of the Rule 12b-1 Trustees, on
May 14, 1998.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to 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, except in accordance with rules of the Commission.
Thus, it will not deal in the over-the-counter market 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
B-19
<PAGE>
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 Commission. This
limitation, in the opinion of the Fund, will not significantly affect the Fund's
ability to pursue its present investment objective. 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 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, as
amended, 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, 1998:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund............................ $ 1,649,700 $ 1,432,068 $ 1,622,075
Total brokerage commissions paid to Prudential
Securities............................................................. $ 103,450 $ 77,615 $ 83,991
Percentage of total brokerage commissions paid to Prudential
Securities............................................................. 6.5% 5.4% 5.2%
</TABLE>
The Fund effected approximately 6.5% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended July 31, 1998. Of the total brokerage commissions paid
during such period, $909,555 (or 67%) 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 (NAV) 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 NAV 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
B-20
<PAGE>
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."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to: (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
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 NAV. Using the
Fund's NAV at July 31, 1998, 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..... $12.63
Maximum sales charge (5% of offering price)................ .66
------
Maximum offering price..................................... $13.29
------
------
CLASS B
Net asset value, offering price and redemption price to
public per Class B share*................................ $12.57
------
------
CLASS C
Net asset value, offering price and redemption price to
public per Class C share*................................ $12.57
------
------
CLASS Z
Net asset value, offering price and redemption price to
public per Class Z share................................. $12.64
------
------
<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
B-21
<PAGE>
(h) (i) a client of a Prudential Securities financial adviser who gives such
financial adviser discretion to purchase the Prudential Mutual Funds for his or
her account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or (ii)
a client of an unaffiliated registered investment adviser which is a client of a
Prudential Securities financial adviser, if such unaffiliated adviser has
discretion to purchase the Prudential Mutual Funds for the accounts of his or
her customers but only if the client of such unaffiliated adviser participates
in a market timing program conducted by such unaffiliated adviser; provided such
accounts in the aggregate have assets of at least $15 million invested in the
Prudential Mutual Funds.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your Dealer 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 your Dealer will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day. See "How the Fund
Values its Shares" in the Prospectus.
The Distributor or the Transfer Agent 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 NAV 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 your Dealer will not be aggregated to determine the reduced sales
charge.
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
enrollment 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
B-22
<PAGE>
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.
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 (CDSC) 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>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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 Transfer Agent, the Distributor or your Dealer at the
time of redemption, that you are entitled to the reduced CDSC. The reduced CDSC
will be granted subject to confirmation of your holdings.
B-23
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of 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 NAV per share next determined after receipt of the check or proceeds
by the Transfer Agent. Such shareholders will receive credit for any CDSC 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 the relative NAV next determined after receipt of an order in
proper form. An exchange will be treated as a redemption and purchase for tax
purposes. 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-24
<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 Transfer Agent, the
Distributor or your Dealer. 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 Investment Plan."
<FN>
- ------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming compounding).
This example is for illustrative purposes only and is not intended to reflect
the performance of an investment in shares of the Fund. The investment return
and principal value of an investment will fluctuate so that an investor's shares
when redeemed may be worth more or less than their original cost.
</TABLE>
B-25
<PAGE>
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, 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
brokerage account (including a Prudential Securities 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your Dealer. 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 NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and/or Distributions."
The Distributor 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 the Distributor 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-26
<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
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal 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 financial adviser
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 such exchange system 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, or at
the bid price on such day in the absence of an asked price. 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 by the Manager in consultation with the
Subadviser to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market maker 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 by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. 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
or board of trade or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such exchange or board of trade. Quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer and
forward currency exchange contracts are valued at
B-27
<PAGE>
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 the Manager or Subadviser (or Valuation Committee or
Board of Trustees), does not represent fair value, are valued by the Valuation
Committee or Board of Trustees in consultation with the Manager or the
Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board of
Trustees or Valuation Committee to materially affect the value of the security.
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 NAV 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 NAV.
In the event the New York Stock Exchange closes early on any business day, the
NAV 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.
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
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 and capital gains which are 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 shareholders have held their shares in
the Fund. 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
reduction 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 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 diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
value of the Fund's 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 (c) 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.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the 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 be treated as gains and
B-28
<PAGE>
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 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.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or of any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders. The Fund may make a "mark-to-market" election with respect to any
marketable stock it holds of a PFIC. If the election is in effect, at the end of
the Fund's taxable year, the Fund will recognize the amount of gains, if any, as
ordinary income with respect to PFIC stock. No loss will be recognized on PFIC
stock except to the extent of gains recognized in prior years. Alternatively,
the Fund, if it meets certain requirements, may elect to treat any PFIC in which
it invests as a "qualified electing fund," in which case, in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain, even if they are not distributed to the
Fund; those amounts would be subject to the distribution requirements applicable
to the Fund described above.
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.
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
B-29
<PAGE>
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 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.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares and sells or otherwise disposes of such
shares within 90 days of acquisition may not be allowed to include certain sales
charges incurred in acquiring such shares for purposes of calculating gain or
loss realized upon a sale or exchange of shares of the Fund.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A 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. Foreign shareholders
are advised to consult their own tax advisers with respect to the particular tax
consequences of an investment in the Fund.
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, 1998
were -.20%, 9.48% and 10.97%, respectively. The average annual total returns for
the Class B shares for the one year, five year, ten year and since inception
(September 15, 1987) periods ended July 31, 1998 were -.72%, 9.65%, 10.58% and
9.38%, 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, 1998
were 3.28% and 11.86%, 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, 1998 were 5.37% and 13.11%, 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.
B-30
<PAGE>
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 periods ended July 31, 1998 were 5.05%, 65.54% and 155.49%,
respectively. The aggregate total returns for Class B shares for the one year,
five year, ten year and since inception periods ended July 31, 1998 were 4.28%,
59.47%, 173.22% and 165.18%, respectively. The aggregate total returns for Class
C shares for the one year and since inception periods ended July 31, 1998 were
4.28% and 56.53%, respectively. The aggregate total returns for the Class Z
shares for the one year and since inception periods ended July 31, 1998 were
5.37% and 34.65%, respectively.
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, 1998 were 1.94% for the
Class A shares of the Fund; 1.26% for the Class B shares of the Fund; 1.26% for
the Class C shares of the Fund; and 2.27% 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>
A LOOK AT PERFORMANCE
OVER THE LONG - TERM
AVERAGE ANNUAL
RETURNS
1/1/26 - 12/31/97
Long-Term Govt.
Common Stocks Bonds Inflation
<S> <C> <C>
11.0% 5.2% 3.1%
</TABLE>
(1) Source: Ibbotson Associates. "Stocks, Bonds, Bills and Inflation--1998
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.
B-31
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business trust and a
Massachusetts business corporation relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, in certain
circumstances, be held personally liable for the obligations of the Fund, which
is not the case with a corporation. The Fund believes that this risk is not
material. The Declaration of Trust of the Fund provides that shareholders shall
not be subject to any personal liability for the acts or obligations of the Fund
and that every written obligation, contract, instrument or undertaking made by
the Fund shall contain a provision to the effect that the shareholders are not
individually bound thereunder.
Massachusetts counsel for the Fund has advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such provisions when adequate notice of such
provision is given, except possibly in a few jurisdictions. With respect to all
types of claims in the latter jurisdictions and with respect to tort claims,
contract claims when the provision referred to is omitted from the undertaking,
claims for taxes and certain statutory liabilities, a shareholder may be held
personally liable to the extent that claims are not satisfied by the Fund.
However, upon payment of any such liability, the shareholder will be entitled to
reimbursement from the general assets of the 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
B-32
<PAGE>
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,
1998, the Fund incurred fees of approximately $2,170,000 for the services of
PMFS.
PricewaterhouseCoopers 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-33
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--90.2%
COMMON STOCKS--59.9%
- ------------------------------------------------------------
Advertising--0.6%
121,000 Interpublic Group of Companies, Inc. $ 7,290,250
- ------------------------------------------------------------
Airlines--0.2%
303,600 Trans World Airlines, Inc. 2,523,675
- ------------------------------------------------------------
Automobiles--1.9%
188,200 Ford Motor Co. 10,715,638
161,000 General Motors Corp. 11,642,312
-------------
22,357,950
- ------------------------------------------------------------
Banks--2.4%
122,600 Chase Manhattan Corp. 9,271,625
187,692 First Union Corp. 11,308,443
216,200 Norwest Corp. 7,769,687
-------------
28,349,755
- ------------------------------------------------------------
Beverages--1.0%
304,200 PepsiCo, Inc. 11,806,763
- ------------------------------------------------------------
Chemicals--2.0%
344,800 Agrium, Inc. (Canada) 4,069,246
121,200 Dow Chemical Co. 10,998,900
368,600 Geon Co. 8,270,462
-------------
23,338,608
- ------------------------------------------------------------
Commercial Services--0.6%
409,700 Cendant Corp.(a) 7,092,931
- ------------------------------------------------------------
Computer Software & Services--3.1%
150,000 BMC Software, Inc.(a) 7,396,875
309,600 Compaq Computer Corp. 10,178,100
50,700 Computer Associates International,
Inc. 1,682,606
103,100 Microsoft Corp.(a) $ 11,353,888
217,200 Unisys Corp.(a) 5,986,575
-------------
36,598,044
- ------------------------------------------------------------
Construction--1.8%
283,500 Hanson PLC (ADR) 7,300,125
229,200 J. Ray McDermott, S.A.(a) 6,474,900
195,900 US Home Corp.(a) 7,334,006
-------------
21,109,031
- ------------------------------------------------------------
Diversfied Consumer Products--5.1%
86,300 Avon Products, Inc. 7,464,950
109,700 Colgate-Palmolive Co. 10,140,394
272,000 The Dial Corp. 6,494,000
188,800 Gillette Co. 9,888,400
103,300 Illinois Tool Works, Inc. 5,791,256
81,400 Estee Lauder Cos., Inc. 5,229,950
101,300 Procter & Gamble Co. 8,040,687
74,000 The Unilever Group PLC (ADR)
(United Kingdom) 5,143,000
-------------
58,192,637
- ------------------------------------------------------------
Diversified Operations--0.9%
116,150 General Electric Co. 10,373,647
- ------------------------------------------------------------
Electrical Services--2.2%
298,200 Duke Energy Corp. 17,034,675
214,200 Texas Utilities Co. 8,581,387
-------------
25,616,062
- ------------------------------------------------------------
Electronics--2.7%
88,900 Intel Corp. 7,506,494
281,700 Mattel, Inc. 10,827,843
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electronics (cont'd.)
215,500 Uniphase Corp.(a) $ 10,775,000
155,500 VLSI Technology, Inc.(a) 2,488,000
-------------
31,597,337
- ------------------------------------------------------------
Entertainment--1.3%
145,500 Carnival Corp. 5,374,406
263,100 The Walt Disney Co. 9,060,506
-------------
14,434,912
- ------------------------------------------------------------
Financial Services--3.6%
24,622 Associates First Capital Corp. 1,912,822
111,500 Bear Stearns Co., Inc. 6,271,875
230,900 Federal National Mortgage Association 14,315,800
326,300 MBNA Corp. 10,931,050
108,400 Providian Financial Corp. 8,516,175
-------------
41,947,722
- ------------------------------------------------------------
Foods--0.5%
106,700 Bestfoods 5,935,188
- ------------------------------------------------------------
Hospital Management--2.7%
335,200 Columbia/HCA Healthcare Corp. 9,553,200
363,600 Healthsouth Corp.(a) 9,135,450
333,100 Manor Care, Inc. 12,428,794
-------------
31,117,444
- ------------------------------------------------------------
Insurance--2.0%
80,150 American International Group, Inc. 12,087,622
120,000 Provident Companies, Inc. 4,425,000
95,099 Travelers Group, Inc. 6,371,633
-------------
22,884,255
Hotels & Leisure--0.3%
128,600 Hilton Hotels Corp. $ 3,239,113
- ------------------------------------------------------------
Media--0.8%
284,600 CBS Corp.(a) 9,658,613
- ------------------------------------------------------------
Medical Products & Services--1.7%
77,200 Cardinal Health, Inc. 7,416,025
179,200 Health Care & Retirement Corp.(a) 6,764,800
93,500 Tyco International Ltd. 5,791,156
-------------
19,971,981
- ------------------------------------------------------------
Medical Technology--1.4%
49,000 Abbott Laboratories 2,036,562
260,100 HBO & Co. 7,664,822
111,600 IMS Health, Inc. 7,009,875
-------------
16,711,259
- ------------------------------------------------------------
Metals-Nonferrous--2.1%
175,600 Aluminum Co. of America 12,171,275
123,200 Reynolds Metals Co. 6,468,000
203,900 UCAR International Inc.(a) 5,377,863
-------------
24,017,138
- ------------------------------------------------------------
Mining--0.5%
291,000 Newmont Mining Corp. 5,492,625
- ------------------------------------------------------------
Networking--1.0%
119,900 Cisco Systems, Inc.(a) 11,480,425
- ------------------------------------------------------------
Oil & Gas--3.0%
213,100 Exxon Corp. 14,943,637
477,200 McDermott International, Inc. 12,377,375
376,800 Pioneer Natural Resources Co. 7,418,250
-------------
34,739,262
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Oil & Gas Equipment & Services--2.4%
237,800 Enron Corp. $ 12,588,537
91,536 Marketspan Corp. 2,522,961
125,200 Schlumberger Ltd. 7,582,425
412,200 Western Gas Resources, Inc. 4,766,063
-------------
27,459,986
- ------------------------------------------------------------
Paper & Forest Products--0.8%
194,000 Longview Fibre Co. 2,279,500
322,900 Louisiana-Pacific Corp. 6,437,819
-------------
8,717,319
- ------------------------------------------------------------
Pharmaceuticals--2.6%
91,000 Bristol Myers Squibb Co. 10,368,313
76,250 Merck & Co., Inc. 9,402,578
90,500 Pfizer, Inc. 9,955,000
-------------
29,725,891
- ------------------------------------------------------------
Real Estate Investment Trust--1.9%
171,300 CCA Prison Realty Trust, 3,693,656
229,800 Crescent Real Estate Equities Co. 6,750,375
252,200 Patriot American Hospitality, Inc. 4,791,800
183,100 Vornado Realty Trust 6,614,488
-------------
21,850,319
- ------------------------------------------------------------
Retail--3.5%
253,200 American Stores Co. 5,871,075
144,300 CVS Corp. 5,916,300
291,000 Kmart Corp.(a) $ 4,746,937
161,200 Proffitt's, Inc.(a) 5,077,800
80,100 Rite Aid Corp. 3,163,950
183,600 Sears Roebuck & Co. 9,317,700
261,900 The Limited, Inc. 7,022,194
-------------
41,115,956
- ------------------------------------------------------------
Steel - Producers--0.8%
183,600 AK Steel Holding Corp. 2,926,125
310,400 British Steel PLC (ADR) (United
Kingdom) 6,499,000
-------------
9,425,125
- ------------------------------------------------------------
Telecommunications--1.1%
95,200 Alcatel Alsthom, Inc. 3,730,650
58,400 Omnipoint Corp.(a) 1,230,050
142,800 WorldCom, Inc.(a) 7,550,550
-------------
12,511,250
- ------------------------------------------------------------
Tobacco--1.0%
101,900 Philip Morris Co., Inc. 4,464,494
286,100 RJR Nabisco Holdings Corp. 6,991,569
-------------
11,456,063
- ------------------------------------------------------------
Waste Management--0.4%
92,400 Waste Management, Inc.(a) 5,093,550
-------------
Total common stocks
(cost $646,090,146) 695,232,086
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--30.3%
CORPORATE BONDS--23.9%
- ------------------------------------------------------------
Aerospace--0.3%
Baa1 3,000 Raytheon Co., Sr. Note,
5.95%, 3/15/01 $ 2,987,550
- ------------------------------------------------------------
Airlines--0.5%
Baa3 5,000 United Airlines, Inc.,
10.67%, 5/1/04 5,954,000
- ------------------------------------------------------------
Automobiles--0.2%
Ba1 2,000 Navistar International
Corp., Sr. Note,
7.00%, 2/1/03 2,007,500
- ------------------------------------------------------------
Banks--1.2%
A1 3,900 Bank Nova Scotia NY,
6.50%, 7/15/07 3,934,125
Baa3 3,000 Capital One Bank,
Sr. Note,
7.08%, 10/30/01 3,062,010
A1 2,100 National Australia Bank
Ltd.,
6.40%, 12/10/07 2,161,362
Baa1 5,000 Skandinaviska Enskilda
Banken,
7.50%, 3/29/49 5,170,000
--------------
14,327,497
- ------------------------------------------------------------
Cable & Pay Television Systems--0.4%
Ba3 2,000 Century Communications
Corp., Sr. Note,
9.75%, 2/15/02 2,150,000
Baa3 2,000 Comcast Cable
Communications,
8.375%, 5/1/07 2,229,380
--------------
4,379,380
- ------------------------------------------------------------
Chemicals--0.2%
Ba3 2,000 ISP Holdings, Inc.,
Sr. Note,
9.75%, 2/15/02 2,110,000
Computer Software--0.3%
Baa1 $ 4,000 Computer Associates
International, Inc.,
6.375%, 4/15/05 $ 3,931,720
- ------------------------------------------------------------
Diversified Products--0.3%
Baa1 1,000 SB Treasury Co.,
9.40%, 12/29/49 995,000
A3 3,000 Tokai Preferred Cap, LLC
1.00%, 12/29/49 2,786,250
--------------
3,781,250
- ------------------------------------------------------------
Engineering--0.1%
Ba2 1,200 CSC Holdings, Inc.,
Sr. Note,
7.625%, 7/15/18 1,205,400
- ------------------------------------------------------------
Entertainment--0.5%
Baa3 5,000 Royal Caribbean Cruises
Ltd.,
Sr. Note,
8.25%, 4/1/05 5,390,000
- ------------------------------------------------------------
Financial Services--7.7%
B2 5,000 Advanta Corp.,
7.25%, 8/16/99 4,931,450
Baa3 9,500 AT&T Capital Corp.,
6.41%, 8/13/99 9,542,750
Ba2 4,000 Conseco Finance Trust,
8.796%, 4/1/27 4,393,640
Contifinancial Corp.,
Sr. Notes,
Ba1 5,000 8.375%, 8/15/03 5,035,700
Ba1 3,300 8.125%, 4/1/08 3,187,437
A3 3,300 ERP Operating, LP,
6.63%, 4/13/05 3,290,694
Aa3 11,000 Team Fleet Financing
Corp.,
7.35%, 5/15/03 11,464,062
Ford Motor Credit Co.,
Notes,
A1 6,000 7.32%, 5/23/02 6,060,000
A1 5,000 7.75%, 3/15/05 5,390,000
Baa1 17,000 Lehman Brothers Holdings, Inc.,
6.33%, 8/1/00 17,084,150
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
A2 $ 18,000 Salomon, Inc.,
7.30%, 5/15/02 $ 18,625,140
--------------
89,005,023
- ------------------------------------------------------------
Foods--0.3%
Baa3 3,400 Kroger Co., Sr. Note,
6.375%, 3/1/08 3,365,082
- ------------------------------------------------------------
Hotels & Leisure--0.6%
ITT Corp., Notes,
Ba1 3,500 6.25%, 11/15/00 3,414,635
Ba1 3,500 6.75%, 11/15/03 3,372,390
--------------
6,787,025
- ------------------------------------------------------------
Industrial--0.6%
Scotia Pacific Co.,
A3 2,200 7.11%, 1/20/14 2,170,256
Baa2 4,800 7.71%, 1/20/14 4,781,280
--------------
6,951,536
- ------------------------------------------------------------
Media--1.9%
Baa3 14,000 News America Holdings
Inc.,
6.703%, 5/21/04 14,140,000
Baa3 5,500 Time Warner, Inc.,
8.11%, 8/15/06 6,043,070
Ba2 1,850 Viacom, Inc.,
7.75%, 6/1/05 1,962,943
--------------
22,146,013
- ------------------------------------------------------------
Oil & Gas Equipment & Services--0.8%
Baa2 3,500 BJ Services Co., Sr.
Note,
7.00%, 2/1/06 3,571,190
R & B Falcon Corp.,
Sr. Notes,
Ba1 5,000 6.50%, 4/15/03 4,968,400
Ba1 1,500 7.375%, 4/15/18 1,440,000
--------------
9,979,590
- ------------------------------------------------------------
Packaging--0.2%
Ba1 2,100 Owens Illinois Inc.,
7.50%, 5/15/10 2,120,832
Paper & Forest Products--0.2%
Baa3 $ 2,000 Fort James Corp., Note,
6.234%, 3/15/01 $ 2,000,440
- ------------------------------------------------------------
Real Estate Investment Trust--0.1%
Baa3 550 Colonial Realty, LP,
Sr. Note,
7.00%, 7/14/07 546,975
Baa2 500 First Industrial Realty
Trust
7.60%, 7/15/28 493,325
--------------
1,040,300
- ------------------------------------------------------------
Restaurants--0.6%
Darden Restaurants, Inc.,
Baa1 2,500 6.375%, 2/1/06 2,389,025
Baa1 4,500 7.125%, 2/1/16 4,435,650
--------------
6,824,675
- ------------------------------------------------------------
Retail--1.6%
Federated Dept. Stores,
Inc.,
Baa2 7,500 8.125%, 10/15/02 7,958,625
Baa2 2,500 8.50%, 6/15/03 2,715,000
Baa2 2,000 10.00%, 2/15/01 2,168,800
Ba2 2,000 Fred Meyer, Inc.,
7.375%, 3/1/05 2,001,160
Ba2 5,000 Kmart Corp.,
8.125%, 12/1/06 5,225,000
--------------
20,068,585
- ------------------------------------------------------------
Telecommunications--1.1%
A3 2,000 Cable & Wireless
Communication, Note,
6.375%, 3/6/03 2,004,480
Ba1 3,000 LCI International Inc.,
7.25%, 6/15/07 3,078,240
Baa3 7,000 Tele-Communications,
Inc., Sub. Deb.,
9.25%, 4/15/02 7,667,100
--------------
12,749,820
- ------------------------------------------------------------
Transportation/Trucking/Shipping--1.9%
Baa2 10,000 CSX Corp., Sub. Deb.,
7.45%, 5/1/07 10,623,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
Portfolio of Investments as of July 31, 1998 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Transportation/Trucking/Shipping (cont'd.)
Baa1 $ 11,000 Norfolk Southern Corp.,
Note,
6.95%, 5/1/02 $ 11,296,120
--------------
21,920,020
- ------------------------------------------------------------
Utilities--2.1%
Aaa 3,000 California
Infrastructure, PG&E,
6.32%, 9/25/05 3,030,000
Cleveland Electric
Illuminating,
Ba1 3,000 7.19%, 7/1/00 3,044,400
Ba1 2,000 7.67%, 7/1/04 2,091,200
Baa1 450 Hyder, PLC
6.875%, 12/15/07 457,236
Niagara Mohawk Power Corp.,
Ba1 2,875 6.875%, 4/1/03 2,920,799
Ba1 4,500 7.375%, 8/1/03 4,682,070
Ba1 2,000 8.00%, 6/1/04 2,138,660
Ba2 6,000 Western Massachusetts
Electric Co.,
7.375%, 7/1/01 6,088,800
--------------
24,453,165
- ------------------------------------------------------------
Waste Management--0.1%
Baa3 1,000 USA Waste Services, Inc.,
Note,
6.125%, 7/15/01 998,020
Total corporate bonds
(cost $270,416,937) 276,484,423
--------------
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--6.1%
United States Treasury Bonds,
4,026 3.625%, 4/15/28 3,974,151
27,000 8.125%, 8/15/19 34,488,180
24,450 6.125%, 11/15/27 25,844,383
United States Treasury Notes,
1,100 5.50%, 2/15/08 1,095,182
3,050 5.625%, 5/15/08 3,078,578
1,250 6.125%, 8/15/07 1,297,075
900 7.25%, 5/15/04 974,394
--------------
Total U.S. government
securities
(cost $70,831,066) 70,751,943
--------------
FOREIGN GOVERNMENT BONDS--0.3%
Ba2 $ 4,000 City of Moscow, (Russia)
9.50%, 5/31/00 $ 3,440,000
B+(b) 500 City of St. Petersburg,
(Russia)
9.50%, 6/18/02 350,000
--------------
Total foreign government
(cost $4,518,260) 3,790,000
--------------
Total debt obligations
(cost $345,766,263) 351,026,366
--------------
Total long-term
investments
(cost $991,856,409) 1,046,258,452
--------------
SHORT-TERM INVESTMENTS--9.0%
CORPORATE BONDS--0.1%
- ------------------------------------------------------------
Banks
A2 1,000 First Union Corp.,
9.45%, 6/15/99
(cost $1,104,060) 1,029,000
--------------
- ------------------------------------------------------------
REPURCHASE AGREEMENT--8.9%
103,812 Joint Repurchase
Agreement Account
5.61%, 8/3/98,
(cost $103,812,000;
Note 5) 103,812,000
--------------
Total short-term
investments
(cost $104,916,060) 104,841,000
--------------
- ------------------------------------------------------------
Total Investments--99.2%
(cost $1,096,772,469;
Note 4) 1,151,099,452
Other assets in excess of
liabilities--0.8% 8,816,299
--------------
Net Assets--100% $1,159,915,751
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Standard & Poor's rating.
ADR--American Depository Receipt.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1998
<S> <C>
Investments, at value (cost $1,096,772,469)................................................................. $1,151,099,452
Cash........................................................................................................ 228,772
Receivable for investments sold............................................................................. 10,287,068
Dividends and interest receivable........................................................................... 7,917,001
Receivable for Fund shares sold............................................................................. 749,674
Prepaid expenses............................................................................................ 45,886
--------------
Total assets............................................................................................. 1,170,327,853
--------------
Liabilities
Payable for investments purchased........................................................................... 6,728,546
Payable for Fund shares reacquired.......................................................................... 2,167,343
Management fee payable...................................................................................... 665,535
Distribution fee payable.................................................................................... 585,949
Accrued expenses............................................................................................ 264,729
--------------
Total liabilities........................................................................................ 10,412,102
--------------
Net Assets.................................................................................................. $1,159,915,751
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 920,239
Paid-in capital in excess of par......................................................................... 1,015,617,864
--------------
1,016,538,103
Undistributed net investment income...................................................................... 1,384,812
Accumulated net realized gain on investments............................................................. 87,665,853
Net unrealized appreciation on investments............................................................... 54,326,983
--------------
Net assets, July 31, 1998................................................................................... $1,159,915,751
--------------
--------------
Class A:
Net asset value and redemption price per share
($485,689,864 / 38,457,582 shares of beneficial interest issued and outstanding)...................... $12.63
Maximum sales charge (5% of offering price).............................................................. .66
------
Maximum offering price to public......................................................................... $13.29
------
------
Class B:
Net asset value, offering price and redemption price per share
($533,353,620 / 42,414,858 shares of beneficial interest issued and outstanding)...................... $12.57
------
------
Class C:
Net asset value, offering price and redemption price per share
($9,201,203 / 731,714 shares of beneficial interest issued and outstanding)........................... $12.57
------
------
Class Z:
Net asset value, offering price and redemption price per share
($131,671,064 / 10,419,748 shares of beneficial interest issued and outstanding)...................... $12.64
------
------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<PAGE>
PRUDENTIAL BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1998
<S> <C>
Income
Interest................................... $ 36,163,798
Dividends (net of foreign withholding taxes
of $143,621)............................ 8,602,741
-------------
Total income............................ 44,766,539
-------------
Expenses
Management fee............................. 7,857,149
Distribution fee--Class A.................. 1,234,570
Distribution fee--Class B.................. 5,784,317
Distribution fee--Class C.................. 81,752
Transfer agent's fees and expenses......... 2,640,000
Reports to shareholders.................... 335,000
Custodian's fees and expenses.............. 215,000
Registration fees.......................... 190,000
Legal fees................................. 41,000
Audit fees................................. 30,000
Insurance.................................. 24,000
Trustees' fees and expenses................ 20,000
Miscellaneous.............................. 20,078
-------------
Total expenses.......................... 18,472,866
-------------
Net investment income......................... 26,293,673
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions.................... 155,550,453
Foreign currency transactions.............. (650)
-------------
155,549,803
-------------
Net change in unrealized appreciation
(depreciation) on investments.............. (126,216,321)
-------------
Net gain on investments....................... 29,333,482
-------------
Net Increase in Net Assets
Resulting from Operations..................... $ 55,627,155
-------------
-------------
</TABLE>
PRUDENTIAL BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended July 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 26,293,673 $ 20,934,760
Net realized gain on
investments and foreign
currency transactions.... 155,549,803 92,822,065
Net change in unrealized
appreciation
(depreciation) of
investments.............. (126,216,321) 97,850,789
-------------- --------------
Net increase in net assets
resulting from
operations............... 55,627,155 211,607,614
-------------- --------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (12,700,788) (8,678,960)
Class B.................. (10,437,329) (8,766,533)
Class C.................. (148,597) (97,195)
Class Z.................. (3,608,837) (2,758,541)
-------------- --------------
(26,895,551) (20,301,229)
-------------- --------------
Distributions from net
realized gains on
investment transactions
Class A.................. (57,771,866) (17,250,282)
Class B.................. (69,878,157) (26,414,816)
Class C.................. (920,721) (273,589)
Class Z.................. (14,427,869) (6,764,801)
-------------- --------------
(142,998,613) (50,703,488)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold..................... 195,965,154 583,212,616
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 160,126,884 65,884,101
Cost of shares reacquired... (341,566,835) (220,143,556)
-------------- --------------
Net increase in net assets
from Fund shares
transactions............. 14,525,203 428,953,161
-------------- --------------
Total increase (decrease)...... (99,741,806) 569,556,058
Net Assets
Beginning of year.............. 1,259,657,557 690,101,499
-------------- --------------
End of year(a)................. $1,159,915,751 $1,259,657,557
-------------- --------------
-------------- --------------
- ---------------
(a) Includes undistributed net
investment income of....... $ 1,384,812 $ 1,986,876
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
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.
- ------------------------------------------------------------
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 on the 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.
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. The effect of applying this statement was
to decrease undistributed net investment income by $186, increase accumulated
net realized gain on investments by $99,848 and decrease paid in capital by
$99,662 for the year ended July 31, 1998. 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 had a distribution agreement with Prudential Securities Incorporated
('PSI') which acted as the distributor of the Class A, Class B, Class C and
Class Z shares. The Fund compensated 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 were accrued daily and payable monthly. No distribution or
service fees were paid to PSI as distributor of the Class Z shares of the Fund.
Effective July 1, 1998, Prudential Investment Management Services LLC ('PIMS')
became the distributor of the Fund and serves the Fund under the same terms and
conditions as under the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensated 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% of the average daily net
assets of the Class A, B and C shares, respectively, for the year ended July 31,
1998.
PSI has advised the Fund that it received approximately $359,000 in front-end
sales charges resulting from sales of Class A shares during the year ended July
31, 1998. From these fees, PSI paid such sales charges to
- --------------------------------------------------------------------------------
B-43
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Fund that for the year ended July 31, 1998, it received
approximately $820,000 and $5,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders, respectively.
PSI, PIC, PIFM and PIMS 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. 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 did not borrow any amounts
pursuant to the Agreement during the year ended July 31, 1998. 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. The Agreement expired on December 30, 1997 and has been
extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
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, 1998, the
Fund incurred fees of approximately $2,170,000 for the services of PMFS. As of
July 31, 1998, approximately $172,000 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 nonaffiliates.
For the year ended July 31, 1998, PSI received approximately $103,500 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, 1998, were $1,577,446,098 and
$1,693,942,904, respectively, which includes purchases and sales of U.S.
government obligations of $444,746,462 and $399,778,178, respectively.
The cost basis of investments for federal income tax purposes as of July 31,
1998 was $1,096,883,147 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $54,216,305 (gross unrealized
appreciation--$103,786,088; gross unrealized depreciation--$49,569,783).
- ------------------------------------------------------------
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, 1998, the Fund
had a 13.7% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $103,812,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor was as follows:
Credit Suisse First Boston Corp., 5.67%, dated 7/31/98, in the principal amount
of $175,000,000, repurchase price $175,082,689, due 8/3/98. The value of the
collateral including accrued interest is $180,594,823.
Bear, Stearns & Co. Inc., 5.66%, dated 7/31/98, in the principal amount of
$175,000,000, repurchase price $175,082,542, due 8/3/98. The value of the
collateral including accrued interest is $179,027,728.
Salomon Smith Barney Inc., 5.64%, dated 7/31/98, in the principal amount of
$175,000,000, repurchase price $175,082,251, due 8/3/98. The value of the
collateral including accrued interest is $178,789,931.
SBC Warburg Dillon Read Inc., 5.52% dated 7/31/98, in the principal amount of
$235,118,000, repurchase price $235,226,153, due 8/3/98. The value of the
collateral including accrued interest is $240,150,611.
- ------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
B-44
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
Transactions in shares of beneficial interest for the years ended July 31, 1998
and July 31, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1998:
Shares sold....................... 3,967,817 $ 52,091,809
Shares issued in reinvestment of
dividends and distributions..... 5,263,433 64,754,657
Shares reacquired................. (9,908,242) (129,373,980)
----------- -------------
Net decrease in shares outstanding
before conversion............... (676,992) (12,527,514)
Shares issued upon conversion from
Class B......................... 3,632,745 46,694,238
----------- -------------
Net increase in shares
outstanding..................... 2,955,753 $ 34,166,724
----------- -------------
----------- -------------
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....................... 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
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------
<S> <C> <C>
Year ended July 31, 1998:
Shares sold....................... 5,179,076 $ 67,414,895
Shares issued in reinvestment of
dividends and distributions..... 6,244,089 76,307,531
Shares reacquired................. (10,219,280) (133,027,987)
----------- -------------
Net increase in shares outstanding
before conversion............... 1,203,885 10,694,439
Shares reacquired upon conversion
into Class A.................... (3,615,791) (46,694,238)
----------- -------------
Net decrease in shares
outstanding..................... (2,411,906) $ (35,999,799)
----------- -------------
----------- -------------
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....................... 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
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1998:
Shares sold....................... 323,478 $ 4,203,230
Shares issued in reinvestment of
dividends and distributions..... 84,293 1,030,457
Shares reacquired................. (178,945) (2,326,256)
----------- -------------
Net increase in shares
outstanding..................... 228,826 $ 2,907,431
----------- -------------
----------- -------------
Year ended July 31, 1997:
Shares sold....................... 232,388 $ 2,935,142
Shares issued in connection with
acquisition of Prudential
Allocation Fund--Strategy
Portfolio....................... 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
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
<S> <C> <C>
Year ended July 31, 1998:
Shares sold....................... 5,472,022 $ 72,255,220
Shares issued in reinvestment of
dividends and distributions..... 1,463,704 18,034,239
Shares reacquired................. (5,753,738) (76,838,612)
----------- -------------
Net increase in shares
outstanding..................... 1,181,988 $ 13,450,847
----------- -------------
----------- -------------
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....................... 891 12,363
Shares issued in connection with
acquisition of The Prudential
Institutional Fund--Balanced
Fund............................ 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
----------- -------------
----------- -------------
</TABLE>
- ------------------------------------------------------------
Note 7. Dividends
On September 22, 1998 the Board of Trustees of the Fund declared the following
dividends per share, payable on September 30, 1998 to shareholders of record on
September 25, 1998:
<TABLE>
<CAPTION>
Class B
Class A and C Class Z
-------- -------- --------
<S> <C> <C> <C>
Ordinary Income.................. $ .075 $ .05 $ .0825
</TABLE>
- --------------------------------------------------------------------------------
B-45
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Year Ended July 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 14.01 $ 11.85 $ 12.04 $ 11.12 $ 11.75
-------- -------- -------- -------- -------
Income from investment operations
Net investment income................... .33 .34 .31 .34 .33
Net realized and unrealized gain (loss)
on investment transactions........... .29 2.96 .28 1.11 (.05)
-------- -------- -------- -------- -------
Total from investment operations..... .62 3.30 .59 1.45 .28
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment income.... (.34) (.36) (.29) (.33) (.37)
Distributions from net realized gains on
investment and foreign currency
transactions......................... (1.66) (.78) (.49) (.20) (.54)
-------- -------- -------- -------- -------
Total distributions.................. (2.00) (1.14) (.78) (.53) (.91)
-------- -------- -------- -------- -------
Net asset value, end of year............ $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(a):........................ 5.05% 29.09% 4.89% 13.67% 2.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $485,690 $497,461 $262,096 $119,829 $37,512
Average net assets (000)................ $493,828 $306,717 $246,609 $ 69,754 $29,875
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.19% 1.17% 1.20% 1.22% 1.23%
Expenses, excluding distribution
fees.............................. .94% .92% .95% .97% 1.00%
Net investment income................ 2.51% 2.84% 2.53% 2.90% 2.84%
For Class A, B, C and Z shares:
Portfolio turnover rate.............. 144% 140% 97% 201% 108%
</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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 13.96 $ 11.80 $ 12.00 $ 11.09 $ 11.72
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................... .24 .26 .21 .26 .24
Net realized and unrealized gain (loss)
on investment transactions........... .27 2.95 .28 1.10 (.05)
-------- -------- -------- -------- --------
Total from investment operations..... .51 3.21 .49 1.36 .19
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.... (.24) (.27) (.20) (.25) (.28)
Distributions from net realized gains on
investment and foreign currency
transactions......................... (1.66) (.78) (.49) (.20) (.54)
-------- -------- -------- -------- --------
Total distributions.................. (1.90) (1.05) (.69) (.45) (.82)
-------- -------- -------- -------- --------
Net asset value, end of year............ $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):........................ 4.28% 28.24% 4.05% 12.79% 1.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $533,354 $625,715 $420,465 $392,291 $445,609
Average net assets (000)................ $578,432 $431,425 $437,792 $409,419 $392,133
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.94% 1.92% 1.95% 1.97% 2.00%
Expenses, excluding distribution
fees.............................. .94% .92% .95% .97% 1.00%
Net investment income................ 1.76% 2.09% 1.78% 2.34% 2.08%
</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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------- ------------------------
August 1,
1994(a)
Year Ended July 31, through Year Ended July 31,
------------------------------------ July 31, ------------------------
1998 1997 1996 1995 1998 1997
-------- ----- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $13.96 $11.80 $12.00 $ 11.12 $ 14.01 $ 11.85
-------- ----- -------- --------- ----------- --------
Income from investment operations
Net investment income................... .24 .26 .21 .21 .37 .46
Net realized and unrealized gain (loss)
on investment transactions........... .27 2.95 .28 1.12 .29 2.87
-------- ----- -------- --------- ----------- --------
Total from investment operations..... .51 3.21 .49 1.33 .66 3.33
-------- ----- -------- --------- ----------- --------
Less distributions
Dividends from net investment income.... (.24) (.27) (.20) (.25) (.37) (.39)
Distributions from net realized gains on
investment and foreign currency
transactions......................... (1.66) (.78) (.49) (.20) (1.66) (.78)
-------- ----- -------- --------- ----------- --------
Total distributions.................. (1.90) (1.05) (.69) (.45) (2.03) (1.17)
-------- ----- -------- --------- ----------- --------
Net asset value, end of period.......... $12.57 $13.96 $11.80 $ 12.00 $ 12.64 $ 14.01
-------- ----- -------- --------- ----------- --------
-------- ----- -------- --------- ----------- --------
TOTAL RETURN(b):........................ 4.28% 28.24% 4.05% 12.49% 5.37% 29.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $9,201 $7,023 $3,525 $ 3,046 $ 131,671 $129,459
Average net assets (000)................ $8,175 $4,790 $2,444 $ 920 $ 128,358 $ 99,391
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.94% 1.92% 1.95% 2.04%(d) .94% .92%
Expenses, excluding distribution
fees.............................. .94% .92% .95% 1.04%(d) .94% .92%
Net investment income................ 1.76% 2.09% 1.78% 2.20%(d) 2.76% 3.12%
<CAPTION>
March 1,
1996(c)
through
July 31,
1996
--------
PER SHARE OPERATING PERFORMANCE:
<S> <C>
Net asset value, beginning of period.... $12.16
--------
Income from investment operations
Net investment income................... .13
Net realized and unrealized gain (loss)
on investment transactions........... (.28)
--------
Total from investment operations..... (.15)
--------
Less distributions
Dividends from net investment income.... (.16)
Distributions from net realized gains on
investment and foreign currency
transactions......................... --
--------
Total distributions.................. (.16)
--------
Net asset value, end of period.......... $11.85
--------
--------
TOTAL RETURN(b):........................ (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $4,015
Average net assets (000)................ $4,217
Ratios to average net assets:
Expenses, including distribution
fees.............................. .95%(d)
Expenses, excluding distribution
fees.............................. .95%(d)
Net investment income................ 2.72%(d)
</TABLE>
- ---------------
(a) Commencement of offering of Class C 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 each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Commencement of offering of Class Z shares.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<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 (the
'Fund') (formerly Prudential Allocation Fund--Balanced Portfolio) at July 31,
1998, the results of its operations for the year then ended and the changes in
its net assets and the financial highlights for the two years in the period 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 audits. We conducted our audits 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 audits, which included confirmation of securities at July
31, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the three years in the period ended July 31, 1996 were audited by other
independent accountants, whose opinion dated September 16, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 17, 1998
B-49
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
<TABLE>
<S> <C>
SMALL STOCKS $5,519.97
COMMON STOCKS $1,828.33
LONG-TERM BONDS $39.07
TREASURY BILLS $14.25
INFLATION $9.02
</TABLE>
Source: Stocks, Bonds, Bills and Inflation. 1998 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).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. 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 '97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <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% 9.6%
- --------------------------------------------------------------------------------------------------------------------
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% 9.5%
- --------------------------------------------------------------------------------------------------------------------
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% 10.2%
- --------------------------------------------------------------------------------------------------------------------
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% 12.8%
- --------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
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 17.12
</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.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1986 through December 31, 1997. It does not represent
the performance of any Prudential Mutual Fund.
Total Returns of Major World Stock Markets (12/31/86--12/31/97)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
The Netherlands 20.5%
Sweden 20.4%
Spain 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9%
USA 17.1%
UK 16.6%
France 15.6%
Germany 12.1%
Austria 9.6%
Japan 6.6%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. as of 12/31/97. 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Appreciation and Reinvesting
Dividends $304,596
Capital Appreciation only $105,413
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1998 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: $12.5 Trillion
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.5%
U.S. 49.8%
Pacific
Basin 15.6%
Europe 32.1%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 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 approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[CHART]
- ------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1998 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 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical
investment diversified over different asset portfolios. The chart shows
the range of annual total returns for major stock and bond indices for the
period from December 31, 1977 through December 31, 1997. The horizontal
"Best Returns Zone" band shows that a hypothetical blend portfolio
constructed of one-third U.S. stocks (S&P 500), one-third foreign stocks
(EAFE Index), and one-third U.S. bonds (Lehman Index) would have
eliminated the "highest highs" and "lowest lows" of any single asset
class.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK
& BOND
INDICES OVER THE PAST 20 YEARS
(12/31/77-12/31/97)*
<S> <C> <C>
S&P 500 37.6% -7.2%
EAFE 69.9% -23.2%
Lehman Aggregate 32.6% -2.9%
"Best Returns Zone"
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
</TABLE>
* Source: Prudential Investment Corporation based on data from
Lipper Analytical New Applications (LANA). Past performance is
not indicative of future results. The S&P 500 Index is a
weighted, unmanaged index comprised of 500 stocks which provides
a broad indication of stock price movements. The Morgan Stanley
EAFE Index is an unmanaged index comprised of 20 overseas stock
markets in Europe, Australia, New Zealand and the Far East. The
Lehman Aggregate Index includes all publicly-issued investment
grade debt with maturities over one year, including U.S.
government and agency issues, 15 and 30-year fixed-rate
government agency mortgage securities, dollar denominated SEC
registered corporate and government securities, as well as
asset-backed securities. Investors cannot invest directly in
stock or bond market indices.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO 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,
1997 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,
1997. 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 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and nearly
6,500 domestic and international financial advisers. 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 40 million people worldwide.
Long one of the largest issuers of life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $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 1.5 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, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 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 throughout the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $4 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997, Prudential Investments Fund Management is the
eighteenth 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) 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 LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc., and Mercator
Asset Management LP as the subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. There are multiple subadvisers for
The Target Portfolio Trust.
(2) As of December 31, 1996.
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 LLC, 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 monitors
approximately 200 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, 1996. 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 Investments, a business group 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 LLC, 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 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities.(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.
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Three
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, 1997.
(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, 1998.
Statement of Assets and Liabilities at July 31, 1998.
Statement of Operations for the year ended July 31, 1998.
Statement of Changes in Net Assets for the years ended July 31, 1998
and 1997.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
(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. Incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on September 26,
1997 (File No. 33-12531).
(c) Certificate of Amendment of Declaration of Trust. Incorporated
by reference to Exhibit No. 1(c) to Post-Effective Amendment No. 19
to the Registration Statement on Form N-1A filed via EDGAR on
September 26, 1997 (File No. 33-12531).
2. Amended By-Laws of the Registrant.*
4. Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on September 26, 1997 (File No. 33-12531).
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. (a) Distribution Agreement.*
(b) Form of Selected Dealer Agreement.*
C-1
<PAGE>
8. (a) Custodian Contract between 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).
(c) Amendment to Custodian Contract.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on September 26, 1997 (File
No. 33-12531).
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on September 26, 1997 (File No. 33-12531).
11. Consent of Independent Accountants.*
15. (a) Amended and Restated Distribution and Service Plan for Class A
shares.*
(b) Amended and Restated Distribution and Service Plan for Class B
shares.*
(c) Amended and Restated Distribution and Service Plan for Class C
shares.*
16. Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit No. 16 to Post-Effective Amendment No. 19 to
the Registration Statement on Form N-1A filed via EDGAR on September
26, 1997 (File No. 33-12531).
17. Financial Data Schedules.*
18. Amended Rule 18f-3 Plan.*
- --------------
* 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 September15, 1998, there were 54,965, 62,855, 1,586 and 1,500 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
C-2
<PAGE>
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential 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 (PIFM).
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 PIFM are
listed in Schedules A and D of Form ADV of PIFM 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 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------------------ ------------------------------ --------------------------------------------------
<S> <C> <C>
Frank W. Giordano Executive Vice President, Senior Vice President, Prudential Securities
Secretary and General Counsel Incorporated; Executive Vice President,
Secretary and General Counsel, PIFM
Robert F. Gunia Executive Vice President and Vice President, Prudential Investments; Executive
Treasurer Vice President and Treasurer, PIFM; Senior Vice
President, Prudential Securities Incorporated
Neil A. McGuinness Executive Vice President Executive Vice President and Director of
Marketing, Prudential Mutual Funds & Annuities
(PMF&A); Executive Vice President, PIFM
Brian Storms Officer-in-Charge, President, President, PMF&A; Officer-in-Charge, President,
Chief Executive Officer and Chief Executive Officer and Chief Operating
Chief Operating Officer Officer, 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 (PIC) of The Prudential Insurance Company of
Officer and Director America (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 Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Money Fund, Command
Government Fund, Command Tax-Free Fund, 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 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 High Yield Total Return Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential International
Bond Fund, Inc., The Prudential Investment Portfolios, Inc., Prudential Mid-Cap
Value Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income 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 Real Estate Securities
Fund, 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 20/20
Focus Fund, Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The
Target Portfolio Trust.
(b) Information concerning the officers and directors of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS
AND
POSITIONS AND OFFICES
OFFICES WITH WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- -----------
<S> <C> <C>
E. Michael Caulfield............... President None
Mark R. Fetting
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102......... Executive Vice President None
Jonathan M. Greene................. Executive Vice President None
Jean D. Hamilton................... Executive Vice President None
Ronald P. Joelson.................. Executive Vice President None
Brian M. Storms Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102.........
John R. Strangfeld................. Executive Vice President None
Mario A. Mosse..................... Senior Vice President and Chief Operating None
Officer
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND
POSITIONS AND OFFICES
OFFICES WITH WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------------------- --------------------------------------------- -----------
<S> <C> <C>
Scott S. Wallner................... Vice President, Secretary and Chief Legal None
Officer
Michael G. Williamson.............. Vice President, Comptroller and Chief None
Financial Officer
C. Edward Chaplin.................. Treasurer None
</TABLE>
- --------------
(1) The address of each person named is Prudential Plaza, Newark, New Jersey
07102 unless otherwise noted.
(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,
100 Mulberry Street, Newark, New Jersey 07102-4077 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) 31a-1(f) Rules 31a-1(b)(4) and
(11) and 31a-1(d) will be kept at Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077 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 Post-Effective Amendment to
the Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 32. UNDERTAKINGS
Registrant makes the following undertaking:
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 certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act and has
duly caused this Post-Effective Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Newark, and the State of New Jersey, on the 28th day of September, 1998.
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 28, 1998
- ---------------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Trustee September 28, 1998
- ---------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Trustee September 28, 1998
- ---------------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Trustee September 28, 1998
- ---------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Trustee September 28, 1998
- ---------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee September 28, 1998
- ---------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Trustee September 28, 1998
- ---------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redecker President and Trustee September 28, 1998
- ---------------------------------
RICHARD A. REDECKER
/s/ Robin B. Smith Trustee September 28, 1998
- ---------------------------------
ROBIN B. SMITH
/s/ Louis A. Weil, III Trustee September 28, 1998
- ---------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Trustee September 28, 1998
- ---------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal Financial September 28, 1998
- --------------------------------- and Accounting Officer
GRACE C. TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------------------------------------------------------------------
<C> <S>
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. Incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on September 26,
1997 (File No. 33-12531).
(c) Certificate of Amendment of Declaration of Trust. Incorporated
by reference to Exhibit No. 1(c) to Post-Effective Amendment No. 19
to the Registration Statement on Form N-1A filed via EDGAR on
September 26, 1997 (File No. 33-12531).
2. Amended By-Laws of the Registrant.*
4. Specimen receipt for shares of beneficial interest issued by the
Registrant. Incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 19 to the Registration Statement in
Form N-1A filed via EDGAR on September 26, 1997 (File No. 33-12531).
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. (a) Distribution Agreement.*
(b) Form of Selected Dealer Agreement.*
8. (a) Custodian Contract between 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).
(c) Amendment to Custodian Contract.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on September 26, 1997 (File
No. 33-12531).
10. Opinion of Counsel. Incorporated by reference to Exhibit No. 10 to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on September 26, 1997 (File No. 33-12531).
11. Consent of Independent Accountants.*
15. (a) Amended and Restated Distribution and Service Plan for Class A
shares.*
(b) Amended and Restated Distribution and Service Plan for Class B
shares.*
(c) Amended and Restated Distribution and Service Plan for Class C
shares.*
16. Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit No. 16 to Post-Effective Amendment No. 19 to
the Registration Statement on Form N-1A filed via EDGAR on September
26, 1997 (File No. 33-12531).
17. Financial Data Schedules.*
18. Amended Rule 18f-3 Plan.*
<FN>
- ------------------------
* Filed herewith
</TABLE>
<PAGE>
BY-LAWS
OF
PRUDENTIAL ALLOCATION FUND
As amended through July 11, 1997
<PAGE>
BY-LAWS
OF
PRUDENTIAL ALLOCATION FUND
ARTICLE I.
DEFINITIONS
The terms "ADMINISTRATOR," "COMMISSION," "CUSTODIAN," "DECLARATION,"
"DISTRIBUTOR," "INVESTMENT ADVISER," "1940 ACT," "SHAREHOLDER," "SHARES,"
"TRANSFER," "TRANSFER AGENT," "TRUST," "TRUST PROPERTY," "TRUSTEES," and
"MAJORITY SHAREHOLDER VOTE," have the respective meanings given them in the
Declaration of Trust of Prudential Allocation Fund (formerly Prudential-Bache
FlexiFund) dated February 23, 1987, as amended from time to time.
ARTICLE II.
OFFICES
Section 1. PRINCIPAL OFFICE. Until changed by the Trustees, the
principal office of the Trust in The Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
Section 2. OTHER OFFICES. The Trust may have offices in such other
places without as well as within the Commonwealth as the Trustees may from time
to time determine.
ARTICLE III.
SHAREHOLDERS
Section 1. MEETINGS. Meetings of the Shareholders shall be held to the
extent provided in the Declaration at such place within or without The
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares of
<PAGE>
the Trust or series of the Trust present in person or by proxy and entitled to
vote shall constitute a quorum with respect to Shares of the Trust or such
series at any meeting of the Shareholders.
Section 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his or her address as
recorded on the register of the Trust mailed at least ten (10) days and not more
than ninety (90) days before the meeting. Only the business stated in the
notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice. No notice need be
given to any Shareholder who shall have failed to inform the Trust of his or her
current address, and any failure to give notice of a meeting to a Shareholder,
and any defect in a notice of a meeting given to a Shareholder, shall be deemed
cured (i) if a written waiver of notice, executed before or after the meeting by
the Shareholder or his or her attorney thereunto authorized, is filed with the
records of the meeting, or (ii) if such Shareholder shall attend such meeting,
in person or by proxy, without protesting such lack or defect of notice, or
(iii) in the event that such meeting shall be adjourned to a later date without
the transaction of any business other than a vote to adjourn, if notice of such
adjourned session shall be given to such Shareholder at least ten (10) days
before such adjourned session convenes.
Section 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES. For the purpose
of determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
ninety (90) days prior to the date of any meeting of Shareholders or
distribution or other action as
-2-
<PAGE>
a record date for the determinations of the persons to be treated as
Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration.
Section 4. PROXIES. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy shall
be voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole Share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. If the
holder of any such Share is a minor or a person of unsound mind, and subject to
guardianship or the legal control of any other person as regards the charge or
management of such Share, he or she may vote by his or her guardian or such
other person appointed or having such control, and such vote may be given in
person or by proxy.
Section 5. INSPECTION OF RECORDS. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
-3-
<PAGE>
Section 6. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust or the applicable series of the Trust entitled to vote on the matter (or
such larger proportion thereof as shall be required by law, the Declaration or
these By-Laws for approval of such matter) consent to the action in writing and
the written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE IV.
TRUSTEES
Section 1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the President,
or by any one of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wired to each Trustee at his or her
business address, or personally delivered to him or her at least one day before
the meeting. Such notice may, however, be waived by any Trustee. Notice of a
meeting need not be given to any Trustee if a written waiver of notice, executed
by him or her before or after the meeting, is filed with the records of the
meeting, or to any Trustee who attends the meeting without protesting prior
thereto or at its commencement the lack of notice to him or her. A notice or
waiver of notice need not specify the purpose of any meeting. The Trustees may
meet by means of a telephone conference circuit or similar communications
equipment by means of which all persons participating in the meeting are
connected, which meeting shall be
-4-
<PAGE>
deemed to have been held at a place designated by the Trustees at the meeting.
Except as hereinafter described, participation in a telephone conference meeting
shall constitute presence in person at such meeting. Except as otherwise
required by law, any action required or permitted to be taken at any meeting of
the Trustees may be taken by the Trustees without a meeting if all the Trustees
consent to the action in writing and the written consents are filed with the
records of the Trustees' meetings. Such consents shall be treated for all
purposes as a vote taken at a meeting of the Trustees. Matters required by law
to be approved by vote of a majority of the Trustees cast in person at a meeting
called for the purpose of voting on such approval may not be delegated to any
other Trustee for vote, nor shall participation in a telephone conference
meeting constitute presence in person for such a meeting.
Section 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees
shall be present in person at any regular or special meeting of the Trustees in
order to constitute a quorum for the transaction of business at such meetings
and (except as otherwise required by law, the Declaration or these By-Laws) the
act of a majority of the Trustees present at any such meeting, at which a quorum
is present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
ARTICLE V.
COMMITTEES
Section 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session,
-5-
<PAGE>
including the purchase and sale of securities and the designation of securities
to be delivered upon redemption of Shares of the Trust, and such other powers of
the Trustees as the Trustees may, from time to time, delegate to them except
those powers which by law, the Declaration or these By-Laws they are prohibited
from delegating. The Trustees may also elect from their own number or otherwise
other Committees from time to time, the number composing such Committees, the
powers conferred upon the same (subject to the same limitations as with respect
to the Executive Committee) and the term of membership on such Committees to be
determined by the Trustees. The Trustees may designate a chairman of any such
Committee. In the absence of such designation the Committee may elect its own
Chairman.
Section 2. MEETINGS, QUORUM AND MANNER OF ACTING. The Trustees may
(1) provide for stated meetings of any Committee, (2) specify the manner of
calling and notice required for special meetings of any Committee, (3) specify
the number of members of a Committee required to constitute a quorum and the
number of members of a Committee required to exercise specified powers delegated
to such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in
a book designated for that purpose and kept in the Office of the Trust.
-6-
<PAGE>
ARTICLE VI.
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Declaration or these By-Laws, the President, the Treasurer
and the Secretary shall each hold office until his or her successor shall have
been duly elected and qualified, and all other officers shall hold office at the
pleasure of the Trustees. The Secretary and Treasurer may be the same person.
A Vice President and the Treasurer or a Vice President and the Secretary may be
the same person, but the offices of Vice President, Secretary and Treasurer
shall not be held by the same person. The President shall hold no other office.
Except as above provided, any two offices may be held by the same person. Any
officer may be but none need be a Trustee or Shareholder.
Section 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer without cause, by a vote of a majority of
the Trustees then in office. Any officer or agent appointed by an officer or
Committee may be removed with or without cause by such appointing officer or
Committee.
Section4. POWERS AND DUTIES OF THE PRESIDENT. The President shall be
the principal executive officer of the Trust. He or she may call meetings of
the Trustees and of any
-7-
<PAGE>
Committee thereof when he or she deems it necessary and shall preside at all
meetings of the Shareholders. Subject to the control of the Trustees and to the
control of any Committees of the Trustees, within their respective spheres, as
provided by the Trustees, the President shall at all times exercise a general
supervision and direction over the affairs of the Trust. The President shall
have the power to employ attorneys and counsel for the Trust and to employ such
subordinate officers, agents, clerks and employees as he or she may find
necessary to transact the business of the Trust. He or she shall also have the
power to grant, issue, execute or sign such powers of attorney, proxies or other
documents as may be deemed advisable or necessary in furtherance of the
interests of the Trust. The President shall have such other powers and duties
as from time to time may be conferred upon or assigned to him or her by the
Trustees.
Section 5. POWERS AND DUTIES OF VICE PRESIDENT. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him or her from time to time by the Trustees and the
President.
Section 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be
the principal financial and accounting officer of the Trust. The Treasurer
shall deliver all funds of the Trust which may come into his or her hands to
such Custodian as the Trustees may employ pursuant to Article X of these
By-Laws. He or she shall render a statement of condition of the finances of the
Trust to the Trustees as often as they shall require the same and he or she
shall in general perform all the duties incident to the office of Treasurer and
such other duties as from time to time may be assigned to him or her by the
Trustees. The Treasurer shall give a bond for the faithful
-8-
<PAGE>
discharge of his or her duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
Section 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purpose; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in accordance
with the provisions of these By-Laws and as required by law; and subject to
these By-Laws, he or she shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the Trustees.
Section 8. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall give a bond for the faithful
discharge of his or her duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
Section 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be
-9-
<PAGE>
conferred by the Trustees. No officer shall be prevented from receiving such
compensation as such officer by reason of the fact that he or she is also a
Trustee.
ARTICLE VII.
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of August in each
year and shall end on the last day of July in each year, provided, however, that
the Trustees may from time to time change the fiscal year.
ARTICLEV III.
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX.
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wired for the purposes of these By-Laws when it has
been delivered to a representative of any telegraph, cable or wire company with
instructions that it be telegraphed, cabled or wired.
ARTICLE X.
CUSTODY OF SECURITIES
Section 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds,
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securities and similar investments included in the Trust Property. The
Custodian (and any sub-custodian) shall be a bank having not less than
$20,000,000 aggregate capital, surplus and undivided profits and shall be
appointed from time to time by the Trustees, who shall fix its remuneration.
Section 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by a
Majority Shareholder Vote, the Custodian shall deliver and pay over all Trust
Property held by it as specified in such vote.
Section 3. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed: The Trustees shall cause to be delivered to the
Custodian all securities included in the Trust Property or to which the Trust
may become entitled, and shall order the same to be delivered by the Custodian
only in completion of a sale, exchange, transfer, pledge, loan of portfolio
securities to another person, or other disposition thereof, all as the Trustees
may generally or from time to time require or approve or to a successor
Custodian; and the Trustees shall cause all funds included in the Trust Property
or to which it may become entitled to be paid to the Custodian, and shall order
the same disbursed only for investment against delivery of the securities
acquired (including securities acquired under a repurchase agreement), or the
return of cash held as collateral for loans of portfolio securities, or in
payment of expenses, including management compensation, and liabilities of the
Trust, including distributions to Shareholders, or to a
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successor Custodian. Notwithstanding anything to the contrary in these By-Laws,
upon receipt of proper instructions, which may be standing instructions, the
Custodian may deliver funds in the following cases. In connection with
repurchase agreements, the Custodian shall transmit prior to receipt on behalf
of the Trust of any securities or other property, funds from the Trust's
custodian account to a special custodian approved by the Trustees of the Trust,
which funds shall be used to pay for securities to be purchased by the Trust
subject to the Trust's obligation to sell and the seller's obligation to
repurchase such securities. In such case, the securities shall be held in the
custody of the special custodian. In connection with the Trust's purchase or
sale of financial futures contracts, the Custodian shall transmit, prior to
receipt on behalf of the Trust of any securities or other property, funds from
the Trust's custodian account in order to furnish to and maintain funds with
brokers as margin to guarantee the performance of the Trust's futures
obligations in accordance with the applicable requirements of commodities
exchanges and brokers.
Section 4. CENTRAL CERTIFICATE SYSTEM. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
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<PAGE>
ARTICLE XI.
INDEMNIFICATION
A representative of the Trust shall be indemnified by the Trust with
respect to each proceeding against such representative, except a proceeding
brought by or on behalf of the Trust, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such representative in connection with such proceeding, provided
that such representative acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the Trust
and, with respect to any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The termination of any proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith in a manner which he or she reasonably believed to be in or
not opposed to the best interests of the Trust and, with respect to any criminal
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
A representative of the Trust shall be indemnified by the Trust, with
respect to each proceeding brought by or on behalf of the Trust to obtain
judgment or decree in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such proceeding, if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any claim,
issue, or matter as to which such representative has been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the Trust,
unless and only to the extent that the court in which the proceeding was
brought, or a court of equity in the county in which the Trust has its principal
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office, determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such representative is fairly and
reasonably entitled to indemnity for the expenses which the court considers
proper.
To the extent that the representative of the Trust has been successful on
the merits or otherwise in defense of any proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue or matter therein,
the Trust shall indemnify him or her against all expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
Except as provided in the preceding paragraph any indemnification under the
first two paragraphs of this Article XI (unless ordered by a court) shall be
made by the Trust only as authorized in the specific case upon a determination
that indemnification of the representative of the Trust is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in such paragraphs. The determination shall be made (1) by the Trustees
by a majority vote of a quorum consisting of Trustees who were not parties to
the proceeding, or (2) if a quorum is not obtainable or if a quorum of
disinterested Trustees so directs, by independent legal counsel in a written
opinion, or (3) by a Majority Shareholder Vote.
Expenses (including attorneys' fees) incurred in defending a proceeding may
be paid by the Trust in advance of the final disposition thereof if
(1) authorized by the Trustees in the specific case, and (2) the Trust receives
an undertaking by or on behalf of the representative of the Trust to repay the
advance if it is not ultimately determined that he or she is entitled to be
indemnified by the Trust as authorized in this Article XI.
The indemnification provided by this Article XI shall not be deemed
exclusive of any other rights to which a representative of the Trust or other
person may be entitled under any
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<PAGE>
agreement, vote of Shareholders or disinterested Trustees or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding the office, and shall continue as to a person who has ceased to be
a Trustee, officer, employee or agent and inure to the benefit of his or her
heirs and personal representatives.
The Trust may purchase and maintain insurance on behalf of any person who
is or was a Trustee, officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, director, officer, employee or
agent of another trust, corporation, partnership, joint venture or other
enterprise, against any liability asserted against him or her and incurred by
him or her in any such capacity or arising out of his or her status as such,
regardless of whether the Trust would have the power to indemnify him or her
against the liability under the provisions of this Article XI, provided such
insurance shall be consistent with the provisions of applicable federal and
state laws.
Nothing contained in this Article XI shall be construed to indemnify any
representative of the Trust against any liability to the Trust or to its
Shareholders to which he or she would otherwise be subject by reason of
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
As used in this Article XI, "representative of the Trust" means an
individual (1) who is a present or former Trustee, officer, agent or employee of
the Trust or who serves or has served another trust, corporation, partnership,
joint venture or other enterprise in one of such capacities at the request of
the Trust, and (2) who by reason of his or her position is, has been or is
threatened to be made a party to a proceeding; and "proceeding" includes any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administration or investigative.
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ARTICLE XII.
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted (a) by a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration or these By-Laws, a vote of the Shareholders.
End of By-Laws
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<PAGE>
PRUDENTIAL BALANCED FUND
DISTRIBUTION AGREEMENT
Agreement made as of June 1, 1998, between Prudential Balanced Fund
(the Fund), and Prudential Investment Management Services LLC, a Delaware
limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer
its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder.
<PAGE>
The Fund hereby agrees during the term of this Agreement to sell Shares of the
Fund through the Distributor on the terms and conditions set forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
Except with respect to a period of time (not to exceed 60 days) during
which the Distributor and Prudential Securities Incorporated will serve as
co-distributors of the Fund in the transition of distribution services from
Prudential Securities Incorporated to the Distributor, the Distributor shall be
the exclusive representative of the Fund to act as principal underwriter and
distributor of the Fund's Shares, provided that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and
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<PAGE>
delivered by the Distributor or selected dealers, as described in Section 6.4
hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board. The Fund shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
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<PAGE>
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the Fund's Shares under the Securities Act, to the end that there will
be available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be
no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as
the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be
required to amend its Declaration of Trust or By-Laws to comply with the laws
of any state, to maintain an office in any state, to change the terms of the
offering of its Shares in any state from the terms set forth in its
Registration Statement, to qualify as a foreign corporation in any state or
to consent to service of process in any state other than with respect to
claims arising out of the offering of its Shares. Any such notification may
be withheld, terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 9 hereof, the expense of notification and
maintenance of notification shall be borne by the Fund. The Distributor
shall furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with
4
<PAGE>
such notifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of any
applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any
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<PAGE>
contingent deferred sales charge which is imposed on such sales as set forth in
the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules of
the NASD. Payment of these amounts to the Distributor is not contingent upon
the adoption or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
6
<PAGE>
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and
any reasonable counsel fees incurred in connection therewith) which the
Distributor, its officers, members or any such controlling person may incur
under the Securities Act, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any
alleged omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not misleading,
except insofar as such claims, demands, liabilities or expenses arise out of
or are based upon any such untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with
information furnished by the Distributor to the Fund for use in the
Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, member or
controlling person unless a court of competent jurisdiction shall determine
in a final decision on the merits, that the person to be indemnified was not
liable by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of
such a decision, a reasonable determination, based upon a review of the
facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Trustees or Trustees who
are neither "interested persons" of the Fund as defined in Section 2(a)(19)
of the Investment Company Act nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion. The Fund's agreement to
indemnify the Distributor, its officers and members and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
members, or any such controlling person, such notification to be given by
letter or telegram addressed to the Fund at its principal business office.
The Fund agrees promptly to notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or directors in
connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending against such claims,
demands or liabilities and any reasonable counsel fees incurred in connection
therewith) which the Fund, its officers
7
<PAGE>
and Trustees or any such controlling person may incur under the Securities
Act or under common law or otherwise, but only to the extent that such
liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon
any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus
or necessary to make such information not misleading. The Distributor's
agreement to indemnify the Fund, its officers and Trustees and any such
controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against the Fund,
its officers and Trustees or any such controlling person, such notification
being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof
and thereafter, but only so long as such continuance is specifically approved
at least annually by (a) the Board of the Fund, or by the vote of a majority
of the outstanding voting securities of the applicable class and/or series of
the Fund, and (b) by the vote of a majority of those Trustees who are not
parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of any of the Fund's Plans or in any agreement related thereto
(Independent Trustees), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent Trustees or by vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, or by the Distributor, on sixty (60) days' written
notice to the other party. This Agreement shall automatically terminate in
the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment
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is specifically approved by (a) the Board of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of the independent
Trustees cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New Jersey as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New Jersey, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Investment Management Services LLC
By: /s/ Mark R. Fetting
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Executive Vice President
Prudential Balanced Fund
By: /s/ Richard A. Redeker
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President
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DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i)a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii)a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii)licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to
the Conduct Rules of the NASD and such Conduct Rules shall control any provision
to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable
state and federal laws and all rules and regulations promulgated thereunder
generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds (including
those of each of its classes) only at the regular public offering price
applicable to such Shares and in effect at the time of each transaction. The
procedures relating to all orders and the handling of each order (including the
manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is
not authorized to act as broker or agent for, or employee of, Distributor, any
Fund or any other dealer, and Dealer shall not in any manner represent to any
third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if
the NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or from
Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares only
from Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of
Shares made through Dealer and to furnish Distributor or regulatory authorities
with copies of such records upon request. In that regard, Dealer agrees that,
unless Dealer holds Shares as nominee for its customers or participates in the
NSCC Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor
shall be in Fed Funds, New York clearinghouse or other immediately available
funds and that such funds shall be received by Distributor by the earlier of:
(i) the end of the third (3rd) business day following Dealer's receipt of the
customer's order to purchase such Shares; or (ii) the settlement date
established in accordance with Rule 15c6-1 under the Securities Exchange Act of
1934, as amended. If such payment is not received by Distributor by such date,
Dealer shall forfeit its right to any concession or commission with respect to
such order, and Distributor reserves the right, without notice, forthwith to
cancel the sale, or, at its option, to sell the Shares ordered back to the Fund,
in which case Distributor may hold Dealer responsible for any loss, including
loss of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
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h. Dealer agrees that it: (i)shall assume responsibility for any
loss to the Fund caused by a correction to any order placed by Dealer that is
made subsequent to the trade date for the order, provided such order correction
was not based on any negligence on Distributor's part; and (ii)will immediately
pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of
Shares on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by
mail, telephone, or wire, Dealer shall act as agent for the custodian or trustee
of such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees
to indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for
the purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's
blanket bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the total
sales charges and dealer concessions or commissions, if any, payable to Dealer
shall be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must
be notified at the time of the sale that the sale qualifies for the reduced
sales charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the end
of the month of purchase, Distributor shall be entitled to recover any advance
payment attributable to the redeemed Shares by reducing any account payable or
other monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be
based on the value of Shares attributable to Dealer's customers and eligible for
such payment, and shall be calculated on the basis of and at the rates set forth
in the compensation schedule then in effect. Without prior approval by a
majority of the outstanding shares of a Fund, the aggregate annual fees paid to
Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's Prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer
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hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions whereby the
Fund, under all ordinary circumstances, will redeem Shares held by shareholders
on demand. Dealer agrees that it will not make any representations to
shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at
a price below that next quoted by the Fund for redemption or repurchase, I.E.,
at the net asset value of such Shares, less any applicable deferred sales
charge, or redemption fee, in accordance with the Fund's Prospectus. Dealer
shall, however, be permitted to sell Shares for the account of the customer or
record owner to the Funds at the repurchase price then currently in effect for
such Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has
made, if instructions in proper form, including any outstanding certificates,
are not received by Distributor within the time customary or the time required
by law, the redemption may be canceled forthwith without any responsibility or
liability on Distributor's part or on the part of any Fund, or Distributor, at
its option, may buy the shares redeemed on behalf of the Fund, in which latter
case Distributor may hold Dealer responsible for any loss, including loss of
profit, suffered by Distributor resulting from Distributor's failure to settle
the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations concerning Shares of any Fund except those contained in the
Fund's then current Prospectus or in materials provided by Distributor.
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b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising
or sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and Distributor
shall have no obligation or responsibility with respect to Dealer's right to
purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable
or responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in
any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless Distributor
and the Funds and their predecessors, successors, and affiliates, each current
or former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or regulation (including without limitation the securities laws
and regulations of the United States or any state or foreign country) or any
alleged tort or breach of contract, related to the offer or sale by Dealer of
Shares of the Funds pursuant to this Agreement (except to the extent that
Distributor's negligence or failure to follow correct instructions received from
Dealer is the cause of such loss,
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claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer
and its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of
any claim or complaint or any enforcement action or other proceeding with
respect to Shares offered hereunder against Dealer or its partners, affiliates,
officers, directors, employees or agents, or any person who controls Dealer,
within the meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of (i)
any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions
shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the appointment
of a Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means
shall have no effect upon transactions entered into prior to the effective date
of termination and shall
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not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and
in good standing under the laws of the state of Delaware and is duly registered
or exempt from registration as a broker-dealer in all states and jurisdictions
in which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize Distributor to
enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
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b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer to
enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor have
a debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only, are not
a party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement shall be binding upon the parties hereto when signed
by Dealer and accepted by Distributor.
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17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be
binding upon the parties hereto when signed by Dealer and accepted by
Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ______________________________________
Name:______________________________________
Title:_____________________________________
Date:______________________________________
DEALER: ___________________________________
By: ______________________________________
(Signature)
Name: _________________________________
Title: _________________________________
Address:___________________________________
____________________________________
____________________________________
Telephone: _______________________________
NASD CRD # ______________________________
Prudential Dealer # ______________________
(Internal Use Only)
Date: _________________________________
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AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and each of the Funds (each a "Fund") set forth on Exhibit A.
WHEREAS, the Custodian and each Fund are parties to a custodian contract
(the "Custodian Contract"), dated as of the dates set forth on Exhibit A, which
governs the terms and conditions under which the Custodian maintains custody of
the securities and other assets of each Fund; and
WHEREAS, the Custodian and each Fund desire to amend the terms and
conditions under which the Custodian maintains each Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and each Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions:
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, PROVIDED however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of each Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign subcustodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative as of this
1st day of October, 1997.
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential Balanced Fund
Prudential Equity Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
The High Yield Income Fund, Inc.
The Asia Pacific Fund, Inc.
<PAGE>
By:
/s/ S. Jane Rose
-----------------------
S. Jane Rose
Secretary
The First Australia Fund, Inc.
The First Australia Prime Income Fund, Inc.
By:
/s/ Eugene S. Stark
-----------------------
Eugene S. Stark
Assistant Treasurer
The High Yield Plus Fund, Inc.
By:
/s/ Thomas T. Mooney
-----------------------
Thomas T. Mooney
President
STATE STREET BANK AND TRUST COMPANY
By:
/s/ illegible
-----------------------
Executive Vice President
<PAGE>
EXHIBIT A
NAME OF FUND DATE OF CONTRACT
Global Utility Fund, Inc. December 21, 1989
Nicholas-Applegate Fund, Inc. April 10, 1987
Prudential Balanced Fund February 16, 1990
(formerly Prudential Allocation Fund)
Prudential Equity Fund, Inc. January 16, 1990
Prudential Global Genesis Fund, Inc. October 21, 1987
Prudential Global Natural Resources Fund, Inc. September 18, 1987
Prudential Institutional Liquidity Portfolio, Inc. November 20, 1987
Prudential Intermediate Global Income Fund, Inc. May 11, 1988
The High Yield Income Fund, Inc. November 6, 1987
The Asia Pacific Fund, Inc. April 24, 1987
The First Australia Fund, Inc. November 25, 1985
The First Australia Prime Income Fund, Inc. April 11, 1986
The High Yield Plus Fund, Inc. April 15, 1988
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 20 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
September 17, 1998, 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.
/s/PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 25, 1998
<PAGE>
PRUDENTIAL BALANCED FUND
Amended and Restated
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Balanced Fund (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority of those Directors/Trustees who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors/Trustees), have determined by votes cast
in person at a meeting called for the purpose of voting on this Plan that there
is a reasonable likelihood that adoption and continuation of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined below) are primarily
1
<PAGE>
intended to result in the sale of Class A shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors/Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions and trailer commissions paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A
shares of the Fund, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than
current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A
shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as the Board shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential Balanced Fund" is the designation of the Trustees
under a Declaration of Trust dated February 23, 1987, as amended and restated
on August 16, 1994, and as further amended, and all persons dealing with the
Fund must look solely to the property of the Fund for the enforcement of any
claims against the Fund, and neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
Dated: January 22, 1990, as amended and restated as of August 1, 1994
Amended: June 1, 1998
6
<PAGE>
PRUDENTIAL BALANCED FUND
Amended and Restated
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Balanced Fund (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential Securities or
Prusec and the Distributor for sale of Class B shares of the Fund,
including sales commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports and
sales literature to persons other than current shareholders of the Fund;
and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other than
Prudential Securities or Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential Balanced Fund" is the designation of the Trustees
under a Declaration of Trust dated February 23, 1987, as amended and restated
on August 16, 1994, and as further amended, and all persons dealing with the
Fund must look solely to the property of the Fund for the enforcement of any
claims against the Fund, and neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
Dated: January 22, 1990, as amended and restated as of August 1, 1994
Amended: June 1, 1998
6
<PAGE>
Prudential Balanced Fund
Amended and Restated
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Balanced Fund (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential Securities or
Prusec and the Distributor for sale of Class C shares of the Fund,
including sales commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports and
sales literature to persons other than current shareholders of the Fund;
and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other than
Prudential Securities or Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. AMENDMENTS
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential Balanced Fund" is the designation of the Trustees
under a Declaration of Trust dated February 23, 1987, as amended and restated
on August 16, 1994, and as further amended, and all persons dealing with the
Fund must look solely to the property of the Fund for the enforcement of any
claims against the Fund, and neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
Dated: August 1, 1994
Amended: June 1, 1998
6
<PAGE>
PRUDENTIAL BALANCED FUND
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Trustees, including a majority of the independent Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and a
distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30
of 1% per annum of the average daily net assets of the
class. The initial sales charge is waived or reduced
for certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge
but are subject to a high contingent deferred sales
charge (declining from 5% to zero over a six-year
period) which will be imposed on certain redemptions
and a Rule 12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class. The contingent
deferred sales charge is waived for certain eligible
investors. Class B shares automatically convert to
Class A shares approximately seven years after
purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not
subject to an initial sales charge but are subject to a
1% contingent deferred sales charge which will be
imposed on certain redemptions within the first 12
month after purchase and a Rule 12b-1 fee not to exceed
1% per annum of the average daily net assets of the
class. Class C shares issued on or after November 2,
1998 are subject to a low initial sales charge and a 1%
contingent deferred sales charge which will be imposed
on certain redemptions within the first 18 months after
purchase and a Rule 12b-1 fee not to exceed 1% per
annum of the average daily net assets of the class.
<PAGE>
CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject
to any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of the Fund will be
allocated to each class of the Fund on the basis of the net asset value
of that class in relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class of the Fund may be different
from that paid by another class of the Fund because of Rule 12b-1 fees
and other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
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.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the
2
<PAGE>
existence of any material conflicts among the interests of its several
classes. The Trustees, including a majority of the independent
Trustees, shall take such action as is reasonably necessary to eliminate
any such conflicts that may develop. Prudential Investments Fund
Management LLC, the Fund's Manager, will be responsible for reporting
any potential or existing conflicts to the Trustees.
C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of the Fund's several classes and the proper
allocation of income and expenses among such classes will be examined
annually by the Fund's independent auditors who, in performing such
examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American Institute
of Certified Public Accountants.
Approved: August 26, 1998
Effective: November 2, 1998
3
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<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-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,096,772,469
<INVESTMENTS-AT-VALUE> 1,151,099,452
<RECEIVABLES> 18,953,743
<ASSETS-OTHER> 274,658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,170,327,853
<PAYABLE-FOR-SECURITIES> 6,728,546
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,683,556
<TOTAL-LIABILITIES> 10,412,102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,016,538,103
<SHARES-COMMON-STOCK> 92,023,902
<SHARES-COMMON-PRIOR> 90,069,241
<ACCUMULATED-NII-CURRENT> 1,384,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87,665,853
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 54,326,983
<NET-ASSETS> 1,159,915,751
<DIVIDEND-INCOME> 8,602,741
<INTEREST-INCOME> 36,163,798
<OTHER-INCOME> 0
<EXPENSES-NET> 18,472,866
<NET-INVESTMENT-INCOME> 26,293,673
<REALIZED-GAINS-CURRENT> 155,549,803
<APPREC-INCREASE-CURRENT> (126,216,321)
<NET-CHANGE-FROM-OPS> 55,627,155
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,895,551)
<DISTRIBUTIONS-OF-GAINS> (142,998,613)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,965,154
<NUMBER-OF-SHARES-REDEEMED> (341,566,835)
<SHARES-REINVESTED> 160,126,884
<NET-CHANGE-IN-ASSETS> (99,741,806)
<ACCUMULATED-NII-PRIOR> 1,986,876
<ACCUMULATED-GAINS-PRIOR> 75,014,815
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,857,149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,472,866
<AVERAGE-NET-ASSETS> 493,828,000
<PER-SHARE-NAV-BEGIN> 14.01
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.34)
<PER-SHARE-DISTRIBUTIONS> (1.66)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.63
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
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<PAGE>
<ARTICLE> 6
<CIK> 0000811444
<NAME> THE PRUDENTIAL BALANCED FUND
<SERIES>
<NUMBER> 002
<NAME> THE PRUDENTIAL BALANCED FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,096,772,469
<INVESTMENTS-AT-VALUE> 1,151,099,452
<RECEIVABLES> 18,953,743
<ASSETS-OTHER> 274,658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,170,327,853
<PAYABLE-FOR-SECURITIES> 6,728,546
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,683,556
<TOTAL-LIABILITIES> 10,412,102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,016,538,103
<SHARES-COMMON-STOCK> 92,023,902
<SHARES-COMMON-PRIOR> 90,069,241
<ACCUMULATED-NII-CURRENT> 1,384,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87,665,853
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 54,326,983
<NET-ASSETS> 1,159,915,751
<DIVIDEND-INCOME> 8,602,741
<INTEREST-INCOME> 36,163,798
<OTHER-INCOME> 0
<EXPENSES-NET> 18,472,866
<NET-INVESTMENT-INCOME> 26,293,673
<REALIZED-GAINS-CURRENT> 155,549,803
<APPREC-INCREASE-CURRENT> (126,216,321)
<NET-CHANGE-FROM-OPS> 55,627,155
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,895,551)
<DISTRIBUTIONS-OF-GAINS> (142,998,613)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,965,154
<NUMBER-OF-SHARES-REDEEMED> (341,566,835)
<SHARES-REINVESTED> 160,126,884
<NET-CHANGE-IN-ASSETS> (99,741,806)
<ACCUMULATED-NII-PRIOR> 1,986,876
<ACCUMULATED-GAINS-PRIOR> 75,014,815
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,857,149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,472,866
<AVERAGE-NET-ASSETS> 578,432,000
<PER-SHARE-NAV-BEGIN> 13.96
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> (1.66)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.57
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
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<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-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,096,772,469
<INVESTMENTS-AT-VALUE> 1,151,099,452
<RECEIVABLES> 18,953,743
<ASSETS-OTHER> 274,658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,170,327,853
<PAYABLE-FOR-SECURITIES> 6,728,546
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,683,556
<TOTAL-LIABILITIES> 10,412,102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,016,538,103
<SHARES-COMMON-STOCK> 92,023,902
<SHARES-COMMON-PRIOR> 90,069,241
<ACCUMULATED-NII-CURRENT> 1,384,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87,665,853
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 1,159,915,751
<DIVIDEND-INCOME> 8,602,741
<INTEREST-INCOME> 36,163,798
<OTHER-INCOME> 0
<EXPENSES-NET> 18,472,866
<NET-INVESTMENT-INCOME> 26,293,673
<REALIZED-GAINS-CURRENT> 155,549,803
<APPREC-INCREASE-CURRENT> (126,216,321)
<NET-CHANGE-FROM-OPS> 55,627,155
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,895,551)
<DISTRIBUTIONS-OF-GAINS> (142,998,613)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,965,154
<NUMBER-OF-SHARES-REDEEMED> (341,566,835)
<SHARES-REINVESTED> 160,126,884
<NET-CHANGE-IN-ASSETS> (99,741,806)
<ACCUMULATED-NII-PRIOR> 1,986,876
<ACCUMULATED-GAINS-PRIOR> 75,014,815
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,857,149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,472,866
<AVERAGE-NET-ASSETS> 8,175,000
<PER-SHARE-NAV-BEGIN> 13.96
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> (1.66)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.57
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
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<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-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,096,772,469
<INVESTMENTS-AT-VALUE> 1,151,099,452
<RECEIVABLES> 18,953,743
<ASSETS-OTHER> 274,658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,170,327,853
<PAYABLE-FOR-SECURITIES> 6,728,546
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,683,556
<TOTAL-LIABILITIES> 10,412,102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,016,538,103
<SHARES-COMMON-STOCK> 92,023,902
<SHARES-COMMON-PRIOR> 90,069,241
<ACCUMULATED-NII-CURRENT> 1,384,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87,665,853
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 1,159,915,751
<DIVIDEND-INCOME> 8,602,741
<INTEREST-INCOME> 36,163,798
<OTHER-INCOME> 0
<EXPENSES-NET> 18,472,866
<NET-INVESTMENT-INCOME> 26,293,673
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<APPREC-INCREASE-CURRENT> (126,216,321)
<NET-CHANGE-FROM-OPS> 55,627,155
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,895,551)
<DISTRIBUTIONS-OF-GAINS> (142,998,613)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,965,154
<NUMBER-OF-SHARES-REDEEMED> (341,566,835)
<SHARES-REINVESTED> 160,126,884
<NET-CHANGE-IN-ASSETS> (99,741,806)
<ACCUMULATED-NII-PRIOR> 1,986,876
<ACCUMULATED-GAINS-PRIOR> 75,014,815
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,857,149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18,472,866
<AVERAGE-NET-ASSETS> 128,358,000
<PER-SHARE-NAV-BEGIN> 14
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0)
<PER-SHARE-DISTRIBUTIONS> (2)
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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