<PAGE>
(ICON)
Prudential
Balanced
Fund
ANNUAL
REPORT
July 31, 1999
(LOGO)
<PAGE>
A Message from the Fund's President September 17, 1999
(PHOTO)
Dear Shareholder,
Your Prudential Balanced Fund's return of 10.37% (Class A shares) was slightly
ahead of the Lipper Average for the 12 months ending July 31, 1999, supported
by the very strong performance of its growth stock holdings over that period.
Not only does the Fund invest in stocks, bonds and money market instruments,
its stock component includes both value and growth stock investment styles.
This further diversification helps reduce the potential volatility of its
returns--a prime objective for balanced funds--while helping its overall
performance.
Tapping our combined strengths
Prudential Balanced Fund is one of several mutual funds we offer that combine
the expertise of portfolio managers who have different investment styles or
specialize in different areas of the financial markets. We do this to make it
easier for investors to have a properly diversified portfolio and achieve more
consistent returns over time. With value and growth styles vying in 1999 for
superior returns, it has become increasingly important to have a well-
diversified asset allocation strategy. Moreover, bonds keep their value better
in a steep bear market such as we saw in August 1998.
Our newly reorganized Fixed Income Group illustrates how important we believe
it is to have investment specialists. Earlier in the year, we integrated
Prudential's retail and institutional portfolio managers. This integrated
group now invests approximately $135 billion in assets, making it one of the
three largest fixed-income money managers in the country. To utilize these
integrated resources more effectively, the group has been organized into
teams, each specializing in a different sector of the fixed-income market. The
Corporate Sector team will now be responsible for the day-to-day management of
the bond portion of your Prudential Balanced Fund.
Sticking with your asset allocation strategy
A well-diversified asset allocation strategy helps lessen the effects of
market volatility, provided the strategy remains in place. Therefore, while
it is a good practice to rebalance holdings, when necessary, to keep your
asset allocation consistent with your long-term objectives and risk tolerance,
investors should avoid making rash decisions. Generally speaking, long-term
investment success comes from maintaining an established strategy during both
market highs and market lows.
Thank you for your continued confidence in Prudential mutual funds. I firmly
believe that combining resources, when appropriate, will help us deliver
quality service and performance to all our shareholders.
Sincerely,
John R. Strangfeld
President
Prudential Balanced Fund
<PAGE>
Portfolio Managers' Report
(PHOTOS)
Warren Spitz; Jeff Rose, CFA; and
Steven Kellner, Team Leader of the
Corporate Sector Team--
Fund Managers
Investment Goals and Style
The Balanced Fund invests in a diversified portfolio of stocks, bonds and
money market instruments, with a target range of 50% to 60% for stocks, 30%
to 40% for bonds, and 5% to 15% for cash. It buys stocks and bonds primarily
of larger, more mature companies, but also some smaller, faster-growing
companies. It may invest up to 25% of its assets in bonds rated below
investment grade, commonly known as junk bonds. These are subject to greater
credit risk, but also may provide greater returns. The Fund's objective is to
achieve a high total investment return consistent with moderate risk. There
can be no assurance that the Fund's investment objective will be achieved.
Performance Review
Market trends and asset allocation
Our reporting period included a financial crisis in August 1998, when a
Russian currency devaluation and debt default prompted a steep drop in both
stock and bond markets. Our bonds helped stabilize our return during that
period, although they held back our performance over the full 12 months
because stock markets rebounded sharply. The impact was mitigated by our low
bond allocation compared with our normal target. Investor confidence was hit
again in January, when Brazil devalued its currency and its economy slowed.
Growth stocks held up better than value stocks, and recovered more rapidly
through these uncertainties. To maintain our balanced strategy, we shifted
funds from the rising growth-stock portfolio to the less-expensive value
stocks. In April 1999, investors regained their confidence in global growth,
and our value stocks moved ahead swiftly. Then we rebalanced by shifting
funds from value to growth. Rebalancing moves such as these increase the
likelihood we will buy low and sell high.
Growth stocks
Technology companies led the market by a large margin. Although Internet-
related companies were very popular--more than was justified by their earning
prospects, we think--we achieved strong returns without taking on the risk of
new companies with expensive stocks. Our technology holdings focused on firms
with established businesses in the computing industry, but whose markets are
growing enormously with the rise of the Internet and with new types of
telecommunications service. We had substantial holdings in several companies
with exceptionally high stock returns, including JDS Uniphase (up 262%), EMC
(147%), Oracle (115%), Cisco (95%), and Intel (64%). One of our largest growth
holdings was in the related telecommunications services industry--MCI WorldCom
(up 56%). In a rapidly changing and bitterly competitive industry, we believe
it to be the most likely winner.
We also benefited from our selection of financial companies. This was not an
exceptional year for the industry, but our holdings performed very well,
particularly two banks that focused on their credit card businesses. We took
some profits on our MBNA (up 29%) and Providian (74%) shares, but they
remained among our larger holdings on July 31, 1999.
Pharmaceuticals, including our drug holdings, were the weak growth sector in
the stock market. They had become expensive and suffered when investors moved
to cheaper stocks,
<PAGE>
but our comparative performance benefited because we held less than a
benchmark weight in drug companies.
Value stocks
Although value stocks picked up strongly in April and May 1999, through most
of our reporting period they continued to suffer from uncertainty about global
economic growth. Investors preferred companies with established growth
records, and value stocks trailed.
Industrials were the best-performing value stocks. We did particularly well
with our substantial holdings in Alcoa (up 76%). It is the dominant aluminum
producer, and both the economic recovery in Asia and the trend to lighter
metals in cars suggest that demand will surge. The consolidation of three of
its competitors in August 1999 will help prevent the construction of new
capacity. Among chemicals, our largest holding was Dow Chemical (up 42%).
In August, after the end of our reporting period, Dow announced the purchase
of Union Carbide for $9.3 billion in stock. This strengthens Dow in a period
of industry consolidation. Geon (up 39%) was also among our largest holdings.
Our consumer-related stocks had mixed results. Of our retailers, Sears Roebuck
and Kmart had negative returns over our reporting period, but our substantial
holding in Limited returned about 73%. We had two home builders, including a
very substantial commitment to Hanson PLC (up 80%). Although our auto stocks
lagged the market, Ford spun off to its shareholders its financial subsidiary
Associates First Capital (which we sold) and General Motors spun off Delphi
Automotive Systems. Both Delphi and GM may benefit from Delphi's increased
entrepreneurial efforts. Our tobacco companies--Nabisco Group, Philip Morris,
and RJ Reynolds--also happen to be expanding food companies, but their stock
prices have been dominated by tobacco-related legal problems. They hurt our
performance.
Performance at a Glance
<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 7/31/99
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 10.37% 78.44% N/A 181.99%
Class B 9.44 71.77 162.93% 190.21
Class C 9.44 71.30 N/A 71.30
Class Z 10.63 N/A N/A 48.97
Lipper Balanced Fund Avg.3 9.57 103.64 201.30 ***
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 6/30/99
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 4.04% 12.05% N/A 11.27%
Class B 3.68 12.23 10.80% 9.68
Class C 6.59 N/A N/A 11.89
Class Z 9.78 N/A N/A 13.46
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. The
Fund charges a maximum front-end sales charge of 5% for Class A shares. Class
B shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales charge of 1%
and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998,
have a 1% CDSC if sold within one year. Class Z shares are not subject to a
sales charge or distribution and service (12b-1) fees.
2 Inception dates: Class A, 1/22/90; Class B, 9/15/87; Class C, 8/1/94; Class
Z, 3/1/96.
3 Lipper average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the Balanced Fund category.
*** Lipper Since Inception returns are 211.61% for Class A, 253.09% for Class
B, 103.90% for Class C, and 57.83% for Class Z, based on all funds in each
share class.
- -------------------------------------------------------------------------------
1
<PAGE>
Review Cont'd.
We have a large commitment to hospital management companies and HMOs because
we believe the aging U.S. population means larger markets for their services.
However, the healthcare sector is currently going through growing pains
centered on government reimbursements. It was strongly out of favor, and our
holdings--focused on Columbia HCA Healthcare and HCR Manor Care-- depressed
our return. We consider the current low prices a buying opportunity for our
value strategy. We added Tenet Healthcare and Humana, among others.
We also had a substantial investment in financial companies--including our
real estate holdings--which reduced our return. Financials were hurt by the
uncertainty in the markets and may recover with the global economy.
Bonds
The bond market also had a "flight to quality" in 1998. Our bond holdings
suffered because our corporate bonds fell more than most. Although we made
up some ground when corporates bounced back in 1999, we finished behind our
benchmark.
Looking Ahead
The U.S. economy is growing robustly, and corporate earnings are generally
increasing. However, growth requires capital investment, and this is the kind
of environment that pushes up interest rates. When interest rates rise, stocks
suffer if their profit projections are based on heavy investment for growth or
if their share prices are based on the assumption that profits will grow
rapidly for a long time. Investors are willing to pay more for future earnings
when interest rates are low. Technology stocks often fit this description, so
they tend to suffer along with bond prices. We would be looking for buying
opportunities in technology should rising interest rates bring down share
prices. Our value stock holdings still are priced below growth stocks with
comparable profit potential. We see no need to change their composition until
that gap is closed.
We have invested less in bonds than our normal position. This would shelter
our return should interest rates rise. If they do, we may increase our bond
holdings afterward. We also would increase them if stock prices rise
significantly or if the anticipated global upturn is delayed or aborted
because these events would threaten stock returns. We have a focus on
corporate bonds, which we believe to be good value in today's environment of
rising profits: the extra yield on corporate bonds comes with very little
additional credit risk.
Five Largest Value Holdings
Expressed as a percentage of net assets as of 7/31/99
Alcoa, Inc. 2.0%
Metals--Nonferrous
Dow Chemical Co. 1.4
Chemicals
Hanson PLC ADR 1.3
Construction
McDermott International 1.2
Oil & Gas Equipment & Svcs.
Geon Co. 1.2
Chemicals
Five Largest Growth Holdings
Expressed as a percentage of net assets as of 7/31/99
Tyco International Ltd. 1.3%
Diversified Conglomerate
JDS Uniphase Corp. 1.2
Electrical Equipment
MCI WorldCom, Inc. 1.0
Telecommunications
Cisco Systems, Inc. 1.0
Networking
Enron Corp. 1.0
Oil & Gas Equipment & Svcs.
Portfolio Composition
Expressed as a percentage of net assets as of 7/31/99
Stocks 62.2%
Bonds 29.3
Cash & Equivalents 8.5
- -------------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--91.0%
COMMON STOCKS--62.2%
- ------------------------------------------------------------
Advertising--1.1%
127,800 Interpublic Group of Companies, Inc. $ 5,367,600
143,300 Young & Rubicam Inc. 6,493,281
-------------
11,860,881
- ------------------------------------------------------------
Airlines--1.1%
144,100 AMR Corp.(a) 9,348,487
65,300 USAirways Group, Inc.(a) 2,326,313
-------------
11,674,800
- ------------------------------------------------------------
Automobiles--1.6%
117,909 Delphi Automotive Systems Corp. 2,122,362
100,600 Ford Motor Co. 4,891,675
168,700 General Motors Corp. 10,280,156
-------------
17,294,193
- ------------------------------------------------------------
Banks--1.2%
59,500 Bank One Corp. 3,246,469
93,600 Chase Manhattan Corp. 7,195,500
75,900 Wells Fargo Co. 2,960,100
-------------
13,402,069
- ------------------------------------------------------------
Beverages--1.2%
90,800 Coca-Cola Enterprises, Inc. 2,650,225
232,700 PepsiCo, Inc. 9,104,388
58,400 The Pepsi Bottling Group, Inc. 1,379,700
-------------
13,134,313
- ------------------------------------------------------------
Chemicals--3.0%
401,600 Agrium, Inc. (Canada) 3,572,622
120,700 Dow Chemical Co. 14,966,800
429,300 Geon Co. 13,147,312
84,000 Lyondell Chemical Co. 1,533,000
-------------
33,219,734
Computer Software & Services--3.0%
35,000 America Online, Inc.(a) $ 3,329,375
86,400 BMC Software, Inc.(a) 4,654,800
132,800 EMC Corp.(a) 8,042,700
106,800 Microsoft Corp.(a) 9,164,775
194,850 Oracle Corp.(a) 7,416,478
-------------
32,608,128
- ------------------------------------------------------------
Construction--2.1%
330,100 Hanson PLC (ADR) (United Kindgom) 14,854,500
228,100 U.S. Home Corp.(a) 7,840,937
-------------
22,695,437
- ------------------------------------------------------------
Consulting
21,249 Gartner Group, Inc.(a) 459,502
- ------------------------------------------------------------
Diversfied Consumer Products--2.2%
127,400 Avon Products, Inc. 5,796,700
73,200 Colgate-Palmolive Co. 3,614,250
64,700 Gillette Co. 2,834,669
69,700 Illinois Tool Works, Inc. 5,179,581
72,200 Procter & Gamble Co. 6,534,100
-------------
23,959,300
- ------------------------------------------------------------
Diversified Operations--2.8%
81,950 General Electric Co. 8,932,550
141,000 JDS Uniphase Corp.(a) 12,742,875
366,500 Nabisco Group Holdings Corp. 6,871,875
126,500 Tomkins PLC (ADR) (United Kingdom) 2,284,906
-------------
30,832,206
- ------------------------------------------------------------
Electrical Services--1.2%
110,000 AES Corp.(a) 6,600,000
154,500 Texas Utilities Co. 6,556,594
-------------
13,156,594
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note1)
<C> <S> <C>
- ------------------------------------------------------------
Electronics--3.6%
142,000 Altera Corp.(a) $ 5,147,500
31,000 Broadcom Corp.(a) 3,735,500
150,300 Intel Corp. 10,370,700
72,700 LSI Logic Corp.(a) 3,657,719
307,300 Mattel, Inc. 7,221,550
107,200 Motorola, Inc. 9,782,000
-------------
39,914,969
- ------------------------------------------------------------
Financial Services--3.4%
136,330 Bear Stearns Co., Inc. 5,768,463
75,000 Federal National Mortgage Association 5,175,000
13,500 Goldman Sachs Group, Inc. 868,219
87,300 Lehman Brothers Holdings, Inc. 4,692,375
360,850 MBNA Corp. 10,284,225
112,500 Providian Financial Corp. 10,237,500
-------------
37,025,782
- ------------------------------------------------------------
Foods--0.5%
124,300 Bestfoods 6,059,625
- ------------------------------------------------------------
Health Care Services/Hospital Management--2.1%
390,300 Columbia/HCA Healthcare Corp. 8,684,175
387,900 HCR Manor Care, Inc.(a) 7,903,462
199,900 Humana, Inc.(a) 2,173,913
20,542 LifePoint Hospitals, Inc.(a) 202,852
203,100 Tenet Healthcare Corp.(a) 3,643,106
20,542 Triad Hospitals, Inc.(a) 216,975
-------------
22,824,483
- ------------------------------------------------------------
Hotels & Leisure--0.1%
9,235 Interstate Hotels Corp.(a) 38,095
277,053 Wyndham International, Inc.(a) 1,177,475
-------------
1,215,570
- ------------------------------------------------------------
Insurance--2.2%
86,625 American International Group, Inc. 10,059,328
56,800 Chubb Corp. $ 3,397,350
89,100 SAFECO Corp. 3,391,369
185,800 Selective Insurance Group, Inc. 3,669,550
106,500 Torchmark Corp. 3,501,187
-------------
24,018,784
- ------------------------------------------------------------
Machinery--0.9%
50,500 Applied Materials, Inc.(a) 3,632,844
29,400 Commercial Intertech Corp. 431,813
191,000 Flowserve Corp. 3,354,437
87,000 United Dominion Industries, Ltd.
(Canada) 2,142,375
-------------
9,561,469
- ------------------------------------------------------------
Media--1.9%
256,900 CBS Corp.(a) 11,287,544
75,800 Clear Channel Communications, Inc.(a) 5,272,837
165,500 Infinity Broadcasting Corp.(a) 4,561,594
-------------
21,121,975
- ------------------------------------------------------------
Medical Products & Services--1.8%
79,150 Cardinal Health, Inc. 5,401,987
143,700 Tyco International Ltd. 14,037,694
-------------
19,439,681
- ------------------------------------------------------------
Medical Technology--1.1%
164,900 Abbott Laboratories 7,080,394
163,200 IMS Health, Inc. 4,549,200
-------------
11,629,594
- ------------------------------------------------------------
Metals-Nonferrous--3.3%
356,400 Alcoa Inc. 21,339,450
143,500 Reynolds Metals Co. 8,125,688
237,300 UCAR International Inc.(a) 6,303,281
-------------
35,768,419
- ------------------------------------------------------------
Mining--0.7%
338,900 Newmont Mining Corp. 6,269,650
79,600 Stillwater Mining Co.(a) 1,800,950
-------------
8,070,600
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note1)
<C> <S> <C>
- ------------------------------------------------------------
Networking--1.0%
175,500 Cisco Systems, Inc.(a) $ 10,902,938
1,200 Juniper Networks, Inc.(a) 194,925
-------------
11,097,863
- ------------------------------------------------------------
Oil & Gas Equipment & Services--6.9%
172,300 Anadarko Petroleum Corp. 6,579,706
99,100 Baker Hughes, Inc. 3,449,919
112,200 Burlington Resources, Inc. 4,957,838
127,600 Enron Corp. 10,869,925
71,100 Exxon Corp. 5,643,562
106,536 KeySpan Corp. 2,956,374
477,300 McDermott International, Inc. 13,453,894
270,400 Noble Affiliates, Inc. 7,909,200
438,700 Pioneer Natural Resources Co. (a) 5,099,887
468,600 Western Gas Resources, Inc. 7,731,900
157,800 Williams Companies, Inc. 6,637,462
-------------
75,289,667
- ------------------------------------------------------------
Paper & Forest Products--1.1%
225,900 Longview Fibre Co. 3,684,994
376,000 Louisiana-Pacific Corp. 8,248,500
-------------
11,933,494
- ------------------------------------------------------------
Pharmaceuticals--1.7%
134,500 Bristol-Myers Squibb Co. 8,944,250
101,400 Merck & Co., Inc. 6,863,512
96,900 Pfizer, Inc. 3,288,544
-------------
19,096,306
- ------------------------------------------------------------
Publishing--0.3%
76,300 New York Times Co. 2,999,544
- ------------------------------------------------------------
Real Estate Investment Trust--1.4%
327,600 Crescent Real Estate Equities Co. 7,207,200
217,500 Vornado Realty Trust 7,694,062
-------------
14,901,262
Restaurants--0.7%
172,800 McDonald's Corp. $ 7,203,600
- ------------------------------------------------------------
Retail--2.8%
101,000 CVS Corp. 5,024,750
25,300 Dillard's, Inc. 779,556
320,600 Kmart Corp.(a) 4,648,700
213,800 Sears Roebuck & Co. 8,658,900
251,400 The Limited, Inc. 11,485,838
-------------
30,597,744
- ------------------------------------------------------------
Steel - Producers--1.2%
183,700 AK Steel Holding Corp. 4,144,731
361,500 British Steel PLC (ADR) (United
Kingdom) 9,489,375
-------------
13,634,106
- ------------------------------------------------------------
Telecommunications--1.7%
826 AT&T Corp. 42,901
53,700 Lucent Technologies Inc. 3,493,856
139,200 MCI WorldCom, Inc.(a) 11,484,000
99,800 Telecomunicacoes Brasileiras SA
(ADR) (Brazil)(a) 3,715,025
-------------
18,735,782
- ------------------------------------------------------------
Tobacco--0.7%
130,500 Philip Morris Co., Inc. 4,861,125
122,166 R.J. Reynolds Tobacco Holdings, Inc. 3,344,294
-------------
8,205,419
- ------------------------------------------------------------
Tools--0.3%
97,600 Snap-on, Inc. 3,416,000
- ------------------------------------------------------------
Waste Management--0.3%
107,700 Waste Management, Inc. 2,753,081
-------------
Total common stocks
(cost $593,181,463) 680,811,976
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--28.8%
CORPORATE BONDS--22.5%
- ------------------------------------------------------------
Aerospace--0.2%
Baa3 $ 900 Northrop-Grumman Corp.,
7.875%, 3/1/26 $ 876,204
Baa1 1,300 Raytheon Co., Note,
6.50%, 7/15/05 1,271,101
--------------
2,147,305
- ------------------------------------------------------------
Airlines--0.8%
Continental Airlines,
Inc.,
Notes,
Ba2 1,730 8.00%, 12/15/05 1,641,459
Aa3 1,426 7.46%, 4/1/15 1,418,193
Baa3 5,000 United Airlines, Inc.,
10.67%, 5/1/04 5,606,700
--------------
8,666,352
- ------------------------------------------------------------
Asset Backed Securities--2.1%
Aaa 3,000 California
Infrastructure, PG&E,
6.32%, 9/25/05 2,973,750
Aaa 5,000 Citibank Credit Card
Master Trust,
6.10%, 5/15/08 4,786,150
Aaa 5,000 MBNA Master Credit
Card Trust,
5.90%, 8/15/11 4,685,690
Aa3 11,000 Team Fleet Financing
Corp.,
7.35%, 5/15/03 11,061,875
--------------
23,507,465
- ------------------------------------------------------------
Automobiles--1.4%
Ford Motor Co.,
A1 3,000 6.375%, 2/1/29 2,555,100
A1 600 7.45%, 7/16/31 585,906
Ba1 $ 2,775 Lear Corp., Sr. Note,
7.96%, 5/15/05 $ 2,747,250
Baa3 2,000 Navistar International
Corp., Sr. Note,
7.00%, 2/1/03 1,950,000
Baa1 7,700 TRW, Inc., Note,
6.45%, 6/15/01 7,656,687
--------------
15,494,943
- ------------------------------------------------------------
Banks--1.0%
A1 3,900 Bank Nova Scotia NY,
6.50%, 7/15/07 3,837,844
Aa3 500 Bayer Hypo-Vereinsbank,
8.74%, 6/30/31 484,297
Aaa 1,950 Bayerische Landesbank,
5.875%, 12/1/08 1,786,493
Baa2 3,000 Capital One Bank, Sr.
Note,
7.08%, 10/30/01 3,019,590
A1 2,100 National Australia Bank
Ltd.,
6.40%, 12/10/07 2,062,284
--------------
11,190,508
- ------------------------------------------------------------
Beverages--0.1%
Baa2 600 Coca Cola Bottling Co.,
6.375%, 5/1/09 555,918
- ------------------------------------------------------------
Broadcasting--0.1%
Liberty Media Corp.,
Notes,
Baa3 400 7.875%, 7/15/09 398,750
Baa3 700 8.50%, 7/15/29 700,219
--------------
1,098,969
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Cable & Pay Television Systems--0.7%
Baa2 $ 2,000 British Sky Broadcasting
Group,
6.875%, 2/23/09 $ 1,805,040
Ba3 2,000 Century Communications
Corp., Sr. Note,
9.75%, 2/15/02 2,040,000
Baa2 2,000 Comcast Cable
Communications,
8.375%, 5/1/07 2,116,400
CSC Holdings, Inc.,
Sr. Notes,
Ba2 700 7.875%, 12/15/07 688,100
Ba2 900 7.25%, 7/15/08 848,817
--------------
7,498,357
- ------------------------------------------------------------
Captive Finance--1.2%
A1 5,000 Ford Motor Credit Co.,
Note,
7.75%, 3/15/05 5,152,100
A2 5,000 Sears Roebuck Acceptance
Corp., Note,
6.38%, 10/7/02 4,973,750
Aa1 3,000 Toyota Motor Credit
Corp., Note,
5.625%, 11/13/03 2,883,750
--------------
13,009,600
- ------------------------------------------------------------
Chemicals--0.5%
Ba3 2,000 ISP Holdings, Inc.,
Sr. Note,
9.75%, 2/15/02 2,050,000
Ba3 650 Lyondell Chemical Co.,
9.625%, 5/1/07 659,750
Rohm & Haas Co., Notes,
A3 800 6.95%, 7/15/04 802,904
A3 500 7.40%, 7/15/09 503,555
A3 1,000 7.85%, 7/15/29 1,006,120
--------------
5,022,329
Computer Software & Services--0.1%
Baa1 $ 600 Sun Microsystems Inc.,
Sr. Note,
7.65%, 8/15/09 $ 597,282
- ------------------------------------------------------------
Construction--0.3%
A3 3,000 Hanson PLC
7.375%, 1/15/03 3,060,780
- ------------------------------------------------------------
Containers--0.2%
Ba1 2,100 Owens Illinois Inc.,
7.50%, 5/15/10 1,983,324
- ------------------------------------------------------------
Diversified Operations--0.3%
Baa1 900 Cox Enterprises Inc.,
6.625%, 6/14/02 892,458
Baa3 1,400 Seagram (J.) & Sons
Inc.,
5.79%, 4/15/01 1,382,920
Baa1 600 Tyco International Ltd.,
6.875%, 1/15/29 536,184
--------------
2,811,562
- ------------------------------------------------------------
Electrical Services--0.3%
Ba1 800 AES Corp., Sr. Note,
9.50%, 6/1/09 816,000
Ba3 1,300 CMS Energy Corp.,
Sr. Note,
8.00%, 7/1/01 1,298,180
A3 900 Edison Mission Energy
Co.,
Sr. Note,
7.73%, 6/15/09 903,006
Baa3 800 Utilicorp United Inc.,
Sr. Note,
7.00%, 7/15/04 793,776
--------------
3,810,962
- ------------------------------------------------------------
Financial Services--1.0%
Baa3 1,650 Capital One Financial
Corp., Note,
7.25%, 5/1/06 1,571,625
A1 3,700 Dresdner Funding Trust,
8.15%, 6/30/31 3,436,745
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
Aa3 $ 95 FMR Corp.,
7.57%, 6/15/29 $ 92,470
A3 800 Heller Financial, Inc.,
Note,
6.00%, 3/19/04 766,560
A1 4,500 International Lease
Finance Corp., Note,
5.90%, 3/12/03 4,374,540
Baa1 1,250 Sanwa Finance,
8.35%, 7/15/09 1,233,398
--------------
11,475,338
- ------------------------------------------------------------
Foods--0.7%
Aa3 1,600 Archer Daniels Midland
Co.,
6.625%, 5/1/29 1,434,000
Kroger Co., Sr. Notes,
Baa3 1,800 6.34%, 6/1/01 1,794,375
Baa3 3,400 6.375%, 3/1/08 3,169,140
Baa3 1,000 7.25%, 6/1/09 990,625
Baa3 250 7.70%, 6/1/29 242,969
--------------
7,631,109
- ------------------------------------------------------------
Hotels & Leisure--0.7%
Baa3 5,000 Royal Caribbean Cruises
Ltd., Sr. Note,
8.25%, 4/1/05 5,157,150
Ba1 3,500 Starwood Hotels &
Resorts, Inc., Note,
6.75%, 11/15/03 3,292,870
--------------
8,450,020
- ------------------------------------------------------------
Insurance--0.2%
Ba3 1,900 Conseco Finance Trust,
8.796%, 4/1/27 1,736,106
A2 950 Marsh And Mclennan
Co., Inc., Sr. Note,
6.625%, 6/15/04 942,219
--------------
2,678,325
Investment Banking--2.0%
A1 $ 1,300 Goldman Sachs Group
LP, Note,
5.56%, 1/11/01 $ 1,285,050
Lehman Brothers
Holdings, Inc., Notes,
Baa1 3,565 6.625%, 4/1/04 3,468,139
Baa1 1,370 6.625%, 2/5/06 1,304,555
Aa3 15,000 Salomon, Inc.,
7.30%, 5/15/02 15,300,300
--------------
21,358,044
- ------------------------------------------------------------
Media--0.8%
Baa3 6,500 News America Holdings
Inc.,
6.70%, 5/21/04 6,283,672
Baa3 2,000 Time Warner, Inc.,
8.11%, 8/15/06 2,093,100
Baa2 550 United News & Media PLC,
Note,
7.25%, 7/1/04 545,655
--------------
8,922,427
- ------------------------------------------------------------
Oil & Gas Equipment & Services--0.5%
Baa2 3,500 BJ Services Co.,
Sr. Note,
7.00%, 2/1/06 3,377,255
Baa3 1,000 El Paso Energy Corp.,
Sr. Note,
6.625%, 7/15/01 997,500
Baa1 1,400 Sonat Inc., Note,
7.625%, 7/15/11 1,388,058
--------------
5,762,813
- ------------------------------------------------------------
Paper & Forest Products--0.4%
Baa2 2,000 Fort James Corp., Note,
6.23%, 3/15/01 1,980,980
Baa2 4,800 (b) Scotia Pacific Co.,
7.71%, 1/20/28 2,880,000
--------------
4,860,980
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Real Estate Investment Trust--0.7%
Baa1 $ 800 Duke Realty Ltd., Sr.
Note,
7.30%, 6/30/03 $ 801,625
ERP Operating, LP,
Notes,
A3 5,000 6.15%, 9/15/00 4,977,000
A3 400 7.10%, 6/23/04 394,840
A3 2,000 6.63%, 4/13/15 1,901,460
--------------
8,074,925
- ------------------------------------------------------------
Retail--1.3%
A3 3,525 Dayton Hudson Corp.,
Note,
6.40%, 2/15/03 3,469,904
Federated Dept. Stores,
Inc., Sr. Notes,
Baa2 2,500 8.125%, 10/15/02 2,594,400
Baa2 2,500 8.50%, 6/15/03 2,614,375
Ba1 5,000 Kmart Corp.,
8.125%, 12/1/06 5,050,000
--------------
13,728,679
- ------------------------------------------------------------
Telecommunications--2.4%
A2 7,000 AT&T Corp.,
9.25%, 4/15/02 7,477,960
Baa1 600 Cable & Wireless
Communication, Note,
6.75%, 12/1/08 614,040
A2 900 Electric Lightwave Inc.,
Note,
6.05%, 5/15/04 863,487
Ba1 3,000 LCI International Inc.,
7.25%, 6/15/07 2,945,790
A2 3,000 Lucent Technologies,
Inc.,
6.45%, 3/15/29 2,691,840
MCI WorldCom, Inc.,
Sr. Notes,
A3 1,300 6.125%, 8/15/01 1,292,057
A3 3,000 6.95%, 8/15/28 2,769,570
Ba1 2,400 Qwest Communications
Int'l., Inc., Sr.
Note,
7.50%, 11/1/08 2,376,000
Baa1 2,500 Sprint Capital Corp.,
6.875%, 11/15/28 2,247,875
Telecomunicaciones de
Puerto Rico, Notes,
Baa2 $ 1,800 6.65%, 5/15/06 $ 1,735,272
Baa2 1,400 6.80%, 5/15/09 1,336,790
--------------
26,350,681
- ------------------------------------------------------------
Transportation/Trucking/Shipping--0.5%
Baa1 5,000 Norfolk Southern Corp.,
Note,
6.95%, 5/1/02 5,029,350
- ------------------------------------------------------------
Utilities--1.9%
Baa3 4,500 Calenergy Co., Inc.,
Sr. Note,
6.96%, 9/15/03 4,438,125
Cleveland Electric
Illuminating, Notes,
Ba1 3,000 7.19%, 7/1/00 3,009,000
Ba1 2,000 7.67%, 7/1/04 2,051,200
A2 525 Hydro-Quebec,
7.50%, 4/1/16 532,434
Niagara Mohawk Power Corp.,
Baa2 4,500 7.375%, 8/1/03 4,570,965
Baa2 2,000 8.00%, 6/1/04 2,062,640
A2 600 Pennsylvania Electric
Co.,
Sr. Note,
5.75%, 4/1/04 575,766
Baa3 3,000 Western Massachusetts
Electric Co.,
7.375%, 7/1/01 3,026,400
--------------
20,266,530
- ------------------------------------------------------------
Waste Management--0.1%
Ba1 1,000 Waste Management Inc.,
Note,
6.125%, 7/15/01 993,320
--------------
Total corporate bonds
(cost $252,578,867) 246,038,197
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--5.3%
United States Treasury Bonds,
$ 10,000 8.125%, 8/15/19 $ 11,943,700
8,400 8.125%, 8/15/21 10,120,656
3,600 6.75%, 8/15/26 3,806,424
2,700 6.375%, 8/15/27 2,729,106
8,435 5.25%, 11/15/28 7,359,538
United States Treasury Notes,
250 5.25%, 5/15/04 244,375
5,530 7.50%, 2/15/05 5,913,616
225 6.50%, 5/15/05 230,344
4,900 6.50%, 10/15/06 5,014,856
3,150 4.75%, 11/15/08 2,874,375
8,060 5.50%, 5/15/09 7,818,200
--------------
Total U.S. government
securities
(cost $59,635,048) 58,055,190
--------------
- ------------------------------------------------------------
FOREIGN GOVERNMENT BONDS--1.0%
Republic of Columbia,
(Columbia)
Ba2 700 9.75%, 4/23/09 581,000
Republic of Panama,
(Panama)
Ba1 1,700 4.00%, 7/17/14 1,243,125
Republic of Philippines,
(Philippines)
Ba1 700 8.875%, 4/15/08 666,197
Republic of Poland,
(Poland)
Baa3 1,950 4.00%, 10/27/24 1,258,969
Republic of Quebec,
(Canada)
A2 2,050 7.50%, 7/15/23 2,059,614
United Mexican States,
(Mexico)
Ba2 2,500 10.375%, 2/17/09 2,493,750
Ba2 3,500 5.875%, 12/31/19 2,861,250
--------------
Total foreign government
(cost $11,984,268) 11,163,905
--------------
Total debt obligations
(cost $324,198,183) 315,257,292
--------------
<CAPTION>
Units
WARRANTS(a)
5,384 United Mexican States,
(Mexico)
expiring 12/31/03 $ 0
--------------
Total long-term investments
(cost $917,379,646) 996,069,268
--------------
SHORT-TERM INVESTMENTS--8.6%
CORPORATE BONDS--0.5%
- ------------------------------------------------------------
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000)
Financial Services
NR 5,000 Advanta Corp.,
7.25%, 8/16/99
(cost $5,020,600) 5,002,250
- ------------------------------------------------------------
REPURCHASE AGREEMENT--8.1%
88,651 Joint Repurchase Agreement Account,
5.062%, 8/2/99,
(cost $88,651,000; Note 5) 88,651,000
--------------
Total short-term
investments
(cost $93,671,600) 93,653,250
--------------
- ------------------------------------------------------------
Total Investments--99.6%
(cost $1,011,051,246; Note 4) 1,089,722,518
Other assets in excess of
liabilities--0.4% 4,572,639
--------------
Net Assets--100% $1,094,295,157
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Indicates a restricted security; the cost of such security is $4,800,000.
The value $2,880,000 is approximately 0.3% of net assets.
ADR--American Depository Receipt.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current SAI contains a description of Moody's and Standard & Poor's
ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets July 31, 1999
<S> <C>
Investments, at value (cost $1,011,051,246)................................................................. $1,089,722,518
Dividends and interest receivable........................................................................... 7,316,101
Receivable for investments sold............................................................................. 3,971,492
Receivable for Fund shares sold............................................................................. 599,821
Prepaid expenses............................................................................................ 41,412
--------------
Total assets............................................................................................. 1,101,651,344
--------------
Liabilities
Bank overdraft.............................................................................................. 3,546
Payable for investments purchased........................................................................... 3,746,264
Payable for Fund shares reacquired.......................................................................... 1,937,177
Management fee payable...................................................................................... 622,019
Distribution fee payable.................................................................................... 511,434
Withholding tax payable..................................................................................... 46,389
Accrued expenses............................................................................................ 489,358
--------------
Total liabilities........................................................................................ 7,356,187
--------------
Net Assets.................................................................................................. $1,094,295,157
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 865,981
Paid-in capital in excess of par......................................................................... 954,247,146
--------------
955,113,127
Undistributed net investment income...................................................................... 1,780,283
Accumulated net realized gain on investments............................................................. 58,730,475
Net unrealized appreciation on investments............................................................... 78,671,272
--------------
Net assets, July 31, 1999................................................................................... $1,094,295,157
--------------
--------------
Class A:
Net asset value and redemption price per share
($516,281,302 / 40,791,363 shares of beneficial interest issued and outstanding)...................... $12.66
Maximum sales charge (5% of offering price).............................................................. .67
Maximum offering price to public......................................................................... $13.33
Class B:
Net asset value, offering price and redemption price per share
($445,945,802 / 35,375,883 shares of beneficial interest issued and outstanding)...................... $12.61
Class C:
Net asset value and redemption price per share
($9,939,455 / 788,518 shares of beneficial interest issued and outstanding)........................... $12.61
Sales charge (1% of offering price)...................................................................... .13
Offering price to public................................................................................. $12.74
Class Z:
Net asset value, offering price and redemption price per share
($122,128,598 / 9,642,323 shares of beneficial interest issued and outstanding)....................... $12.67
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
PRUDENTIAL BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income July 31, 1999
<S> <C>
Income
Interest (net of foreign withholding taxes
of $12,675)............................. $ 28,877,963
Dividends (net of foreign withholding taxes
of $143,613)............................ 10,364,081
-------------
Total income............................ 39,242,044
-------------
Expenses
Management fee............................. 7,246,989
Distribution fee--Class A.................. 1,234,793
Distribution fee--Class B.................. 4,900,715
Distribution fee--Class C.................. 95,349
Transfer agent's fees and expenses......... 2,379,000
Custodian's fees and expenses.............. 200,000
Reports to shareholders.................... 200,000
Registration fees.......................... 120,000
Legal fees................................. 41,000
Audit fees................................. 30,000
Insurance.................................. 24,000
Trustees' fees and expenses................ 21,500
Miscellaneous.............................. 20,434
-------------
Total expenses.......................... 16,513,780
-------------
Net investment income......................... 22,728,264
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) on:
Investment transactions.................... 59,535,086
Financial futures transactions............. (565,613)
Foreign currency transactions.............. 2,262
-------------
58,971,735
Net change in unrealized appreciation on
investments................................ 24,344,289
-------------
Net gain on investments....................... 83,316,024
-------------
Net Increase in Net Assets
Resulting from Operations..................... $ 106,044,288
-------------
-------------
</TABLE>
PRUDENTIAL BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended July 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income....... $ 22,728,264 $ 26,293,673
Net realized gain on
investments and foreign
currency transactions.... 58,971,735 155,549,803
Net change in unrealized
appreciation
(depreciation) of
investments.............. 24,344,289 (126,216,321)
-------------- --------------
Net increase in net assets
resulting from
operations............... 106,044,288 55,627,155
-------------- --------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (11,600,552) (12,700,788)
Class B.................. (7,501,189) (10,437,329)
Class C.................. (147,713) (148,597)
Class Z.................. (3,085,601) (3,608,837)
-------------- --------------
(22,335,055) (26,895,551)
-------------- --------------
Distributions from net
realized gains on
investment transactions
Class A.................. (33,667,951) (57,771,866)
Class B.................. (35,854,241) (69,878,157)
Class C.................. (670,807) (920,721)
Class Z.................. (7,850,486) (14,427,869)
-------------- --------------
(78,043,485) (142,998,613)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold..................... 174,931,450 195,965,154
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 95,452,760 160,126,884
Cost of shares reacquired... (341,670,552) (341,566,835)
-------------- --------------
Net increase (decrease) in
net assets from Fund
shares transactions...... (71,286,342) 14,525,203
-------------- --------------
Total decrease................. (65,620,594) (99,741,806)
-------------- --------------
Net Assets
Beginning of year.............. 1,159,915,751 1,259,657,557
-------------- --------------
End of year(a)................. $1,094,295,157 $1,159,915,751
-------------- --------------
-------------- --------------
- ---------------
(a) Includes undistributed net
investment income of:...... $ 1,780,283 $ 1,384,812
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<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. The Fund invests 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 significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Any security for which the primary market is on an
exchange (including Nasdaq National Market System equity securities) is valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices quoted on
such day or at the bid price in the absence of an asked price. 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 an
independent pricing service. 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.
- --------------------------------------------------------------------------------
13
<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.
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 increase undistributed net investment income by $2,262, decrease accumulated
net realized gain on investments by $9,863,628 and increase paid-in capital in
excess of par by $9,861,366 for redemptions utilized as distributions for
federal income tax purposes and due to realized and recognized currency gains
during the year ended July 31, 1999. Net realized gains and net assets were not
affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the services of PIC,
the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS 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 PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PIMS 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,
1999.
PIMS has advised the Fund that it received approximately $203,800 in front-end
sales charges resulting from sales of Class A shares during the year ended July
31, 1999 and from sales of Class C shares during the period November 2, 1998
through July 31, 1999. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
- --------------------------------------------------------------------------------
14
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
PIMS has advised the Fund that for the year ended July 31, 1999, it received
approximately $643,200 and $6,600 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders, respectively.
PIC, PIFM and PIMS are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the year ended July 31, 1999. The purpose of the agreements is
to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
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, 1999, the
Fund incurred fees of approximately $1,972,000 for the services of PMFS. As of
July 31, 1999, approximately $157,000 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.
- ------------------------------------------------------------
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, 1999, were $1,035,947,839 and
$1,165,891,789, respectively, which includes purchases and sales of U.S.
government obligations of $370,240,327 and $374,027,633, respectively.
The cost basis of investments for federal income tax purposes as of July 31,
1999 was $1,013,119,580 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $76,602,938 (gross unrealized
appreciation--$136,842,332; gross unrealized depreciation--$60,239,394).
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, 1999, the Fund
had a 13.9% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $88,651,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor was as follows:
Bear, Stearns & Co. Inc., 5.06%, in the principal amount of $180,000,000,
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest is $183,904,910.
Deutsche Bank Securities Inc., 5.06%, in the principal amount of $96,548,000,
repurchase price $96,588,711, due 8/2/99. The value of the collateral including
accrued interest is $98,479,006.
Salomon Smith Barney Inc., 5.06%, in the principal amount of $180,000,000,
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest is $184,504,113.
Warburg Dillon Read LLC, 5.07%, in the principal amount of $180,000,000,
repurchase price $180,076,050, due 8/2/99. The value of the collateral including
accrued interest is $183,604,710.
- ------------------------------------------------------------
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 upon
the period of time the shares are held. Prior to November 2, 1998, Class C
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. 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.
- --------------------------------------------------------------------------------
15
<PAGE>
Notes to Financial Statements PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
Transactions in shares of beneficial interest for the years ended July 31, 1999
and July 31, 1998 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1999:
Shares sold....................... 5,888,331 $ 72,630,854
Shares issued in reinvestment of
dividends and distributions..... 3,548,537 42,190,816
Shares reacquired................. (10,211,802) (126,616,025)
----------- -------------
Net decrease in shares outstanding
before conversion............... (774,934) (11,794,355)
Shares issued upon conversion from
Class B......................... 3,108,715 37,656,869
----------- -------------
Net increase in shares
outstanding..................... 2,333,781 $ 25,862,514
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------
Year ended July 31, 1999:
Shares sold....................... 4,593,047 $ 56,428,035
Shares issued in reinvestment of
dividends and distributions..... 3,520,532 41,558,742
Shares reacquired................. (12,029,878) (147,746,960)
----------- -------------
Net decrease in shares outstanding
before conversion............... (3,916,299) (49,760,183)
Shares reacquired upon conversion
into Class A.................... (3,122,676) (37,656,869)
----------- -------------
Net decrease in shares
outstanding..................... (7,038,975) $ (87,417,052)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1999:
Shares sold....................... 311,461 $ 3,843,335
Shares issued in reinvestment of
dividends and distributions..... 65,181 770,023
Shares reacquired................. (319,838) (3,923,655)
----------- -------------
Net increase in shares
outstanding..................... 56,804 $ 689,703
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
Year ended July 31, 1999:
Shares sold....................... 3,393,149 $ 42,029,226
Shares issued in reinvestment of
dividends and distributions..... 918,694 10,933,179
Shares reacquired................. (5,089,268) (63,383,912)
----------- -------------
Net decrease in shares
outstanding..................... (777,425) $ (10,421,507)
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended July 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................ .29 .33 .34 .31 .34
Net realized and unrealized gain on
investment transactions........... .92 .29 2.96 .28 1.11
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.21 .62 3.30 .59 1.45
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.29) (.34) (.36) (.29) (.33)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.89) (1.66) (.78) (.49) (.20)
-------- -------- -------- -------- --------
Total distributions............... (1.18) (2.00) (1.14) (.78) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 12.66 $ 12.63 $ 14.01 $ 11.85 $ 12.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):..................... 10.37% 5.05% 29.09% 4.89% 13.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $516,281 $485,690 $497,461 $262,096 $119,829
Average net assets (000)............. $493,917 $493,828 $306,717 $246,609 $ 69,754
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.17% 1.19% 1.17% 1.20% 1.22%
Expenses, excluding distribution
fees........................... .92% .94% .92% .95% .97%
Net investment income............. 2.34% 2.51% 2.84% 2.53% 2.90%
For Class A, B, C and Z shares:
Portfolio turnover rate........... 103% 144% 140% 97% 201%
</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. 17
<PAGE>
Financial Highlights PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended July 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................ .20 .24 .26 .21 .26
Net realized and unrealized gain on
investment transactions........... .92 .27 2.95 .28 1.10
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.12 .51 3.21 .49 1.36
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.19) (.24) (.27) (.20) (.25)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.89) (1.66) (.78) (.49) (.20)
-------- -------- -------- -------- --------
Total distributions............... (1.08) (1.90) (1.05) (.69) (.45)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 12.61 $ 12.57 $ 13.96 $ 11.80 $ 12.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):..................... 9.44% 4.28% 28.24% 4.05% 12.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $445,946 $533,354 $625,715 $420,465 $392,291
Average net assets (000)............. $490,071 $578,432 $431,425 $437,792 $409,419
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.92% 1.94% 1.92% 1.95% 1.97%
Expenses, excluding distribution
fees........................... .92% .94% .92% .95% .97%
Net investment income............. 1.60% 1.76% 2.09% 1.78% 2.34%
</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. 18
<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, ---------------------
1999 1998 1997 1996 1995 1999 1998
------ ------ ------ ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.57 $13.96 $11.80 $12.00 $ 11.12 $ 12.64 $ 14.01
------ ------ ------ ------ --------- -------- --------
Income from investment operations
Net investment income................ .20 .24 .26 .21 .21 .33 .37
Net realized and unrealized gain
(loss) on investment
transactions...................... .92 .27 2.95 .28 1.12 .91 .29
------ ------ ------ ------ --------- -------- --------
Total from investment
operations..................... 1.12 .51 3.21 .49 1.33 1.24 .66
------ ------ ------ ------ --------- -------- --------
Less distributions
Dividends from net investment
income............................ (.19) (.24) (.27) (.20) (.25) (.32) (.37)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.89) (1.66) (.78) (.49) (.20) (.89) (1.66)
------ ------ ------ ------ --------- -------- --------
Total distributions............... (1.08) (1.90) (1.05) (.69) (.45) (1.21) (2.03)
------ ------ ------ ------ --------- -------- --------
Net asset value, end of period....... $12.61 $12.57 $13.96 $11.80 $ 12.00 $ 12.67 $ 12.64
------ ------ ------ ------ --------- -------- --------
------ ------ ------ ------ --------- -------- --------
TOTAL RETURN(b):..................... 9.44% 4.28% 28.24% 4.05% 12.49% 10.63% 5.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $9,939 $9,201 $7,023 $3,525 $ 3,046 $122,129 $131,671
Average net assets (000)............. $9,535 $8,175 $4,790 $2,444 $ 920 $121,398 $128,358
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.92% 1.94% 1.92% 1.95% 2.04%(d) .92% .94%
Expenses, excluding distribution
fees........................... .92% .94% .92% .95% 1.04%(d) .92% .94%
Net investment income............. 1.60% 1.76% 2.09% 1.78% 2.20%(d) 2.60% 2.76%
<CAPTION>
March 1,
1996(c)
through
July 31,
1997 1996
-------- --------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.85 $12.16
-------- --------
Income from investment operations
Net investment income................ .46 .13
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.87 (.28)
-------- --------
Total from investment
operations..................... 3.33 (.15)
-------- --------
Less distributions
Dividends from net investment
income............................ (.39) (.16)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.78) --
-------- --------
Total distributions............... (1.17) (.16)
-------- --------
Net asset value, end of period....... $ 14.01 $11.85
-------- --------
-------- --------
TOTAL RETURN(b):..................... 29.39% (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $129,459 $4,015
Average net assets (000)............. $ 99,391 $4,217
Ratios to average net assets:
Expenses, including distribution
fees........................... .92% .95%(d)
Expenses, excluding distribution
fees........................... .92% .95%(d)
Net investment income............. 3.12% 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. 19
<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') at July 31, 1999, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the three 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, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the two 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 20, 1999
Tax Information (Unaudited) PRUDENTIAL BALANCED FUND
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (July 31, 1999) as to the federal tax status of dividends
and distributions paid by the Fund during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended July 31, 1999, dividends paid from
net investment income were $.293 per share for Class A shares, $.193 per share
for Class B and Class C shares and $.323 per share for Class Z shares, which are
taxable as ordinary income. In addition, the Fund paid to Class A, B, C and Z
shares a short-term capital gain distribution of $.21, which is taxable as
ordinary income and a long-term capital gain distribution of $.68. The Fund
utilized redemptions as distributions in the amount of $.048 and $.065 per Class
A, Class B, Class C and Class Z shares of short-term capital gains and long-term
capital gains, respectively.
We also wish to advise you that 17.74% of the dividends paid from ordinary
income in the fiscal year ended July 31, 1999 qualified for the corporate
dividends received deduction available to corporate tax payers.
We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders. Please be advised that 9.05% of the dividends paid from
ordinary income in the fiscal year ended July 31, 1999 qualify for each of these
states' tax exclusion.
In January 2000, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the dividends and distributions received by you
in calendar year 1999.
- --------------------------------------------------------------------------------
20
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial materials-- and
stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis
points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that
separate mortgage pools into different maturity classes, called tranches.
These instruments are sensitive to changes in interest rates and homeowner
refinancing activity. They are subject to prepayment and maturity extension
risk.
Derivatives: Securities that derive their value from other securities. The
rate of return of these financial instruments rises and falls--sometimes very
suddenly--in response to changes in some specific interest rate, currency,
stock, or other variable.
Discount Rate: The interest rate charged by the Federal Reserve on loans to
member banks.
Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.
Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.
Leverage: The use of borrowed assets to enhance return. The expectation is
that the interest rate charged on borrowed funds will be lower than the return
on the investment. While leverage can increase profits, it can also magnify
losses.
Liquidity: The ease with which a financial instrument (or product) can be
bought or sold (converted into cash) in the financial markets.
Price/Earnings Ratio: The price of a share of stock divided by the earnings
per share for a 12-month period.
Option: An agreement to purchase or sell something, such as shares of stock,
by a certain time for a specified price. An option need not be exercised.
Spread: The difference between two values; often used to describe the
difference between "bid" and "asked" prices of a security, or between the
yields of two similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.
<PAGE>
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--they don't read annual and
semiannual reports. It's quite understandable. These annual and semi-annual
reports are prepared to comply with federal regulations, and are often written
in language that is difficult to understand. So, when most people run into
those particularly daunting sections of these reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:
Performance at a Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "Performance at a Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the
average annual total returns. The cumulative total return is the total amount
of income and appreciation the Fund has achieved in various time periods. The
average annual total return is an annualized representation of the Fund's
performance. It gives you an idea of how much the Fund has earned in an
average year for a given time period. Under the performance box, you'll see
legends that explain the performance information, whether fees and sales
charges have been included in returns, and the inception dates for the Fund's
share classes.
See the performance comparison charts at the back of the report for more
performance information. Please keep in mind that past performance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager, who invests your money for you, reports on successful--
and not-so-successful--strategies in this section of your report. Look for
recent purchases and sales here, as well as information about the sectors the
portfolio manager favors, and any changes that are on the drawing board.
Portfolio of Investments
This is where the report begins to appear technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
<PAGE>
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes), and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class
of shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are
being paid or issued to you. The net asset value fluctuates daily, along with
the value of every security in the portfolio.
Statement of Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your
money). You'll also see capital gains here--both realized and unrealized.
Statement of Changes in Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it--through dividends and
distributions--and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can intimidate readers, but it
does contain useful information. The Notes provide a brief history and
explanation of your Fund's objectives. In addition, they outline how
Prudential Mutual Funds prices securities. The Notes also explain who manages
and distributes the Fund's shares and, more importantly, how much they are
paid for doing so. Finally, the Notes explain how many shares are outstanding
and the number issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages, but on a per-share
basis. It is designed to help you understand how the Fund performed, and to
compare this year's performance and expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted
accounting principles.
Tax Information
This is information which we report annually about how much of your total
return is taxable. Should you have any questions, you may want to consult a
tax adviser.
Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a
hypothetical $10,000 investment in the Fund since its inception or for 10
years (whichever is shorter). To help you put that return in context, we are
required to include the performance of an unmanaged, broad-based securities
index as well. The index does not reflect the cost of buying the securities
it contains or the cost of managing a mutual fund. Of course, the index
holdings do not mirror those of the Fund--the index is a broad-based reference
point commonly used by investors to measure how well they are doing. A
definition of the selected index is also provided. Investors cannot invest
directly in an index.
<PAGE>
Comparing a $10,000 Investment
Prudential Balanced Fund vs. the Lehman Brothers Government/Corporate Bond
Index and the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index)
Class A
Average Annual Total Returns
With Sales Load
Since Inception 10.91%
Five Years 11.13%
One Year 4.85%
Without Sales Load
Since Inception 11.51%
Five Years 12.28%
One Year 10.37%
Class B
Average Annual Total Returns
With Sales Load
Since Inception 9.39%
Ten Years 10.15%
Five Years 11.30%
One Year 4.44%
Without Sales Load
Since Inception 9.39%
Ten Years 10.15%
Five Years 11.43%
One Year 9.44%
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. The lines beneath the graphs are
designed to give you an idea of how much the Fund's returns can fluctuate from
year to year by measuring the best and worst calendar years in terms of total
annual return since the inception of each share class (or for the past ten
years for Class B shares).
These graphs compare a $10,000 investment in the Prudential Balanced Fund
(Class A, B, C, and Z shares) with a similar investment in the Lehman Brothers
Government/Corporate Bond Index and the Standard & Poor's 500 Composite Stock
Price Index (S&P 500 Index) by portraying the account values at the
commencement of operations of Class A, C, and Z shares, and at the beginning of
the ten-year period for Class B shares; and at the end of the fiscal year (July
31), as measured on a quarterly basis, beginning in 1990 for Class A, 1989 for
Class B, 1994 for Class C, and 1996 for Class Z shares. For purposes of the
graphs, and unless otherwise indicated, it has been assumed that (a) the
maximum applicable front-end sales charge was deducted from the initial $10,000
investment in Class A and Class C shares; (b) the maximum applicable contingent
deferred sales charges were deducted from the value of the investment in Class
B and Class C shares, assuming full redemption on July 31, 1999; (c) all
recurring fees (including management fees)
<PAGE>
Class C
Average Annual Total Returns
With Sales Load
Since Inception 11.15%
Five Years 11.14%
One Year 7.35%
Without Sales Load
Since Inception 11.37%
Five Years 11.37%
One Year 9.44%
Class Z
Average Annual Total Returns
Since Inception 12.38%
One Year 10.63%
were deducted; and (d) all dividends and distributions were reinvested. Class B
shares will automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase. This conversion feature is not
reflected in the graphs. Class Z shares are not subject to a sales charge or
distribution and service (12b-1) fees.
The Lehman Brothers Government/Corporate Bond Index is a weighted index of
public, fixed-rate, nonconvertible domestic corporate debt securities rated at
least investment grade, and public obligations of the U.S. Treasury. The S&P
500 Index is an unmanaged index of 500 stocks of large U.S. companies that
give a broad look at how stock prices have performed. The total returns of both
indexes include the reinvestment of all dividends, but do not reflect sales
charges and advisory fees associated with an investment in the Fund. The
securities in the indexes may differ substantially from the securities in the
Fund. These indexes are not the only indexes that may be used to characterize
performance of balanced funds. Other indexes may portray different comparative
performance. Investors cannot invest directly in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
<PAGE>
Class NASDAQ Cusip
A PFCAX 74431M105
B PRFCX 74431M204
C -- 74431M303
Z PFCZX 74431M402
Trustees
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive, North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005, New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower, 321 North Clark Street, Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
MF134E
