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THE PRUDENTIAL INSTITUTIONAL FUND
[logo] Prospectus, January 19, 1994
as supplemented on October 4, 1994
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The Prudential Institutional Fund is a no-load mutual fund that is
designed to provide a range of investment alternatives for certain retirement
programs and arrangements and other institutional investors. The Prudential
Institutional Fund consists of the following seven investment funds:
GROWTH STOCK FUND seeks to achieve long-term growth of capital through
investment primarily in equity securities of established companies with
above-average growth prospects.
STOCK INDEX FUND seeks to provide investment results that correspond to the
price and yield performance of Standard & Poor's 500 Composite Stock Price
Index.
INTERNATIONAL STOCK FUND seeks to achieve long-term growth of capital through
investment in equity securities of foreign issuers. Income is a secondary
objective.
ACTIVE BALANCED FUND seeks to achieve total returns approaching equity
returns, while accepting less risk than an all-equity portfolio, through an
actively-managed portfolio of equity securities, fixed income securities and
money market instruments.
BALANCED FUND seeks to realize long-term total return consistent with moderate
portfolio risk.
INCOME FUND seeks to achieve a high level of income over the longer term while
providing reasonable safety of capital.
MONEY MARKET FUND seeks to achieve high current income, preservation of
principal and maintenance of liquidity, while striving to maintain a $1.00 net
asset value per share.
INVESTMENTS IN THE MONEY MARKET FUND (OR IN ANY OTHER FUND) ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT
THE MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
PROSPECTIVE INVESTORS SHOULD NOTE THAT ALL OF THE FUNDS RESERVE THE RIGHT
TO BORROW MONEY FOR TEMPORARY AND EXTRAORDINARY PURPOSES AND (EXCEPT FOR THE
MONEY MARKET FUND) IN ORDER TO TAKE ADVANTAGE OF INVESTMENT OPPORTUNITIES,
WHICH MAY BE CONSIDERED SPECULATIVE DUE TO THE INCREASED COSTS AND EXPENSES
INVOLVED.
The Prudential Institutional Fund is designed to meet the needs of
retirement program sponsors, program participants, individual retirement
accounts and certain institutional investors who seek the expertise, service,
and commitment to quality that organizations within The Prudential family of
investment service companies can provide. The Prudential affiliates provide
experienced investment management, investor services, recordkeeping, and
administrative services to the Prudential Institutional Fund.
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This Prospectus gives you information about The Prudential Institutional
Fund that you should be aware of before investing. Additional information
about The Prudential Institutional Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information, dated January
19, 1994, as supplemented on October 4, 1994, which information is
incorporated herein by reference and is available, without charge, upon
written request to The Prudential Institutional Fund, 21 Prudential Plaza, 751
Broad Street, Newark, New Jersey 07102-3777.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
Table of Contents
Introduction to the Funds .................................. 1
Expense Information ........................................ 2
Financial Highlights ....................................... 3
The Funds .................................................. 4
Risk Factors ............................................... 7
Management of the Company .................................. 8
Investors Guide to Services ................................ 10
Other Considerations ....................................... 12
Performance and Yield Information .......................... 13
Other Investment Practices, Risk Conditions,
and Policies of the Funds ................................. 14
More Facts About the Company ............................... 20
<PAGE>
The Company. The Prudential Institutional Fund (the "Company") is a
no-load, open-end investment management company, commonly known as a mutual
fund. The Company is organized as a Delaware business trust.
The Funds. The Company is comprised of seven investment portfolios (the
"Funds"), each of which is diversified. Each Fund has its own investment
objectives and policies, which are summarized below and described in detail
beginning on page 4.
<TABLE>
<CAPTION>
Name of Fund Investment Objective Invests Primarily in Investment Adviser
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<S> <C> <C> <C>
Growth Stock Fund Seeks to achieve long-term growth A diversified portfolio of equity Jennison Associates
of capital securities of established companies Capital Corp.
with above average growth prospects ("Jennison")
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Stock Index Fund Seeks to provide investment results A diversified portfolio of equity The Prudential
that correspond to the price and securities, which as a group is Investment Corporation
yield performance of Standard & designed to approximate the price ("PIC")
Poor's 500 Composite Stock Price and yield performance of the S&P
Index 500 Index
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International Stock Fund Seeks to achieve long-term growth A diversified portfolio of equity Mercator Asset
of capital; income is a secondary securities of foreign issuers Management, Inc.
objective ("Mercator")
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Active Balanced Fund Seeks to achieve total returns An actively-managed portfolio of Jennison
approaching equity returns, while equity securities, fixed income
accepting less risk than an all- securities and money market
equity portfolio instruments
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Balanced Fund Seeks to achieve long-term total A diversified portfolio which PIC
return consistent with moderate allocates its assets among equity
portfolio risk securities, fixed income securities
and money market instruments
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Income Fund Seeks to achieve a high level of Debt securities, including corporate PIC
income over the longer term while debt obligations, mortgage-backed and
providing reasonable safety of asset-backed securities, U.S.
capital Government obligations, and U.S.
dollar-denominated debt securities of
foreign issuers
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Money Market Fund Seeks to achieve high current A diversified portfolio of high- PIC
income, preservation of principal quality domestic and U.S. dollar-
and maintenance of liquidity, denominated foreign money market
while striving to maintain a $1.00 instruments that present minimal
net asset value per share credit risks
</TABLE>
Each Fund may be expected to have different investment results and
different market and financial risks, which are described in detail beginning
on page 4. Since shares of a Fund represent an investment in securities with
fluctuating market prices, the net asset value per share of each Fund, other
than the Money Market Fund, and the value of a shareholder's holdings will
vary as the aggregate value of a Fund's portfolio securities increases or
decreases. It is anticipated that shares of the Money Market Fund will be
purchased, redeemed or exchanged at a net asset value of $1.00 per share,
although there can be no assurance that the Fund will be able to maintain a
constant net asset value per share. For information on how to purchase and
redeem shares, or to exchange the shares of one Fund for shares of another
Fund, please refer to pages 10-11.
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Introduction to the Funds
The Advisers. Each Fund is managed by a registered investment adviser
("Adviser") which is a direct or indirect subsidiary of The Prudential
Insurance Company of America ("The Prudential"). The Advisers operate under
the supervision of Prudential Institutional Fund Management, Inc., the
Company's investment manager ("Manager").
Opening an Account. The Administrator of your retirement plan or your
employee benefits office can provide you with detailed information on how to
participate in your plan and how to select a Fund as an investment option.
The dividends paid by each Fund will vary proportionally to the income
received from its investments and the expenses incurred by the Fund. Dividends
and distributions of each Fund are declared in cash and automatically
reinvested in additional shares of the Fund. While shareholders may not elect
to receive dividends and distributions in cash, the same effect may be
achieved at any time by redeeming shares of the Fund.
The investment objectives of each Fund set forth above are fundamental
and may not be changed without a vote of the shareholders of that Fund.
However, the investment policies and practices of each Fund, unless otherwise
specifically stated, are not fundamental. There can be no assurance that any
Fund will achieve its investment objectives.
The Prudential Institutional Fund Prospectus 1
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Expense Information
The following table, including the examples below, is included to assist your
understanding of the various costs and expenses to which an investment in each
Fund would be subject. The fees and expenses set forth below for the Funds are
based on data for the Fund's fiscal year ended September 30, 1993. The example
should not be considered a representation of past or future performance.
Actual fees and expenses for each of the Funds for the current year may be
greater or less than those stated below. A more complete description of all
fees and expenses is included in this Prospectus in the section entitled
"Expenses."
<TABLE>
<CAPTION>
Shareholder Growth Stock International Active Money
Transaction Stock Index Stock Balanced Balanced Income Market
Expenses Fund Fund Fund Fund Fund Fund Fund
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<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchase None None None None None None None
Sales Load Imposed on Reinvested Dividends None None None None None None None
Deferred Sales Load Imposed on Redemptions None None None None None None None
Redemption Fee None None None None None None None
Exchange Fee None None None None None None None
</TABLE>
<TABLE>
<CAPTION>
Annual Operating Expenses (as a percentage of average daily net assets)
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<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (Before Reduction) .70% .40% 1.15% .70% .70% .50% .45%
Distribution Expenses None None None None None None None
Other Expenses (Before Reduction) .96% 1.19% 1.22% 1.19% .98% .79% .65%
Total Operating Expenses (Before Reduction) 1.66% 1.59% 2.37% 1.89% 1.68% 1.29% 1.10%
Total Operating Expenses (After Reduction)+ 1.00% .60% 1.60% 1.00% 1.00% .70% .60%
<FN>
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+ In the interest of limiting the expenses of the Funds, the Manager has
agreed, until September 30, 1996, to bear any expenses which would cause
the ratio of expenses payable by each Fund to average daily net assets
("Fund Operating Expenses") to exceed the Total Operating Expenses (After
Reduction) for that Fund specified in this line of the table. Expenses
paid or assumed under this agreement are subject to recoupment by the
Manager from the relevant Fund in later years, provided that (a) no
recoupment will be made, in any year, if it would result in the Fund's
expense ratio for that year exceeding the estimated Total Operating
Expenses (After Reduction) and (b) no recoupment will be made after
December 31, 1996. Each Fund's organizational expenses will be charged to
that Fund over a period not to exceed 60 months.
</FN>
</TABLE>
Examples: An investor in each Fund would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and (2) redemption at the end
of each future time period*:
1 Year 3 Years 5 Years 10 Years
Growth Stock Fund $10 $32 $55 $122
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Stock Index Fund $ 6 $19 $33 $ 75
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International Stock Fund $16 $50 $87 $190
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Active Balanced Fund $10 $32 $55 $122
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Balanced Fund $10 $32 $55 $122
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Income Fund $ 7 $22 $39 $ 87
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Money Market Fund $ 6 $19 $33 $ 75
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* There are no charges imposed upon redemption.
The above examples should not be considered to be a representation of past or
future expenses for each Fund. Actual expenses may be greater or less than
those shown above. Similarly, the annual rate of return assumed in the above
examples is not an estimate or guarantee of future investment performance, but
is included for illustrative purposes only.
2 The Prudential Institutional Fund Prospectus
<PAGE>
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Financial Highlights (for a share outstanding through-out the indicated period)
The following financial highlights have been audited by Deloitte & Touche,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
Period Ended September 30, 1993
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Growth Stock International Active Money
Stock Index Stock Balanced Balanced Income Market
Fund* Fund* Fund* Fund** Fund* Fund*** Fund**
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<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 1.00
------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income+.............................. .04 .23 .16 .21 .31 .27 .02
Net realized and unrealized gains (losses) on
investment and foreign currency transactions....... 2.08 .94 2.21 .84 1.54 .33 --
------- ------- ------- ------- ------- ------- -------
Total from investment operations.................. 2.12 1.17 2.37 1.05 1.85 .60 .02
------- ------- ------- ------- ------- ------- -------
Less dividends:
Dividends from investment income.................... (.02) (.05) (.02) -- (.05) (.27) (.02)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of period...................... $ 12.10 $ 11.12 $ 12.35 $ 11.05 $ 11.80 $ 10.33 $ 1.00
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN#....................................... 21.22% 11.73% 23.74% 10.50% 18.58% 6.11% 2.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $47,998 $27,142 $31,708 $38,786 $27,663 $35,015 $30,235
Average net assets (000)............................ $17,592 $18,807 $14,491 $12,815 $17,401 $25,626 $25,296
Ratios to average net assets:+/++
Expenses........................................... 1.00% .60% 1.60% 1.00% 1.00% .70% .60%
Net investment income.............................. .31% 2.41% 1.44% 2.68% 3.16% 4.62% 2.73%
Portfolio turnover rate............................. 84% 1% 15% 47% 74% 93% --
<FN>
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* Investment operations commenced on November 5, 1992.
** Investment operations commenced on January 4, 1993.
*** Investment operations commenced on March 1, 1993.
+ Net of expense subsidy.
++ Annualized.
# 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. Total return for periods of less than a full year are not
annualized.
</FN>
</TABLE>
The Prudential Institutional Fund Prospectus 3
<PAGE>
.............................................................................
The Funds
Growth Stock Fund. The objective of the Growth Stock Fund is to achieve
long-term growth of capital through investment primarily in equity securities
of established companies with above-average growth prospects. Current income,
if any, is incidental.
Under normal market conditions, at least 65% of the value of the total
assets of the Fund will be invested in common stocks and preferred stocks of
companies which exceed $1 billion in market capitalization. Stocks will be
selected on a company-by-company basis primarily through use of fundamental
analysis. Jennison, the Adviser for the Fund, looks for companies that have
demonstrated growth in earnings and sales, high returns on equity and assets,
or other strong financial characteristics, and, in the judgment of Jennison,
are attractively valued. These companies tend to have a unique market niche, a
strong new product profile or superior management.
The Fund may also invest up to 35% of its total assets in: (i) common
stocks, preferred stocks and other equity-related securities of companies that
are undergoing changes in management or product and marketing dynamics which
have not yet been reflected in reported earnings but which are expected to
impact earnings in the intermediate term--these securities often lack investor
recognition and are often favorably valued, (ii) other equity-related
securities; (iii) with respect to a maximum of 20% of its total assets, common
stocks, preferred stocks and other equity-related securities of foreign
issuers (including American Depository Receipts ("ADRs")); (iv) investment
grade fixed income securities and mortgage-backed securities, including lower
rated securities (securities rated in the fourth highest rating category by a
rating service (i.e., rated Baa by Moody's Investor Services ("Moody's") or
BBB by Standard & Poor's ("S&P") or, if not rated, determined by Jennison to
be of comparable quality to securities so rated)); and (v) obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities.
The effort to achieve superior investment return necessarily involves a
risk of exposure to declining values. Securities in which the Fund may
primarily invest have historically been more volatile than the Standard &
Poor's 500 Composite Stock Price Index. Accordingly, during periods when stock
prices decline generally, it can be expected that the value of the Fund will
decline more than the market indices. However, on a long-term basis, Jennison
anticipates that the investment return of the Fund will exceed that of the
market indices.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or incidental income purposes, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase
and sell put and call options on securities and stock indices; and (iv)
purchase and sell futures contracts on stock indices and options thereon.
See Other Investment Practices, Risk Conditions, and Policies of the
Funds for a fuller description of these investment practices and their risks.
Stock Index Fund. The Stock Index Fund seeks to provide investment
results that correspond to the price and yield performance of the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500 Index"). The S&P 500 Index is
an unmanaged, market-weighted index of 500 stocks selected by Standard &
Poor's on the basis of their market size, liquidity and industry group
representation. Inclusion in the S&P 500 Index in no way implies an opinion by
Standard & Poor's as to a stock's attractiveness as an investment. The S&P 500
Index, composed of stocks representing more than 70% of the total market value
of all publicly traded U.S. common stocks, is widely regarded as
representative of the performance of the U.S. stock market as a whole.
"Standard & Poor'sr", "S&Pr", "S&P 500r", "Standard & Poor's 500", and "500"
are trademarks of McGraw-Hill, Inc. and have been licensed for use by The
Prudential Insurance Company of America and its affiliates and subsidiaries.
The Fund is not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the Fund. See Stock
Index Fund in the Statement of Additional Information regarding certain
additional disclaimers and limitations of liability on behalf of Standard &
Poor's.
Traditional methods of security analysis will not be used in connection
with the management of this Fund by PIC, the Adviser for the Fund, in making
investment decisions. Instead, PIC will use a passive, indexing approach. To
achieve its investment objective, the Fund will purchase equity securities
that as a group reflect the price and yield performance of the S&P 500 Index.
The Fund intends to purchase all 500 stocks included in the S&P 500 Index in
approximately the same proportions as they are represented in the S&P 500
Index. The Fund may, however, seek to compensate for omissions of stocks that
are included in the S&P 500 Index, or for purchases of stocks in proportions
that differ from their weightings in the S&P 500 Index, by purchasing other
stocks, in appropriate amounts, that may or may not be included in the S&P 500
Index but which have characteristics similar to the omitted or differently
weighted stocks (such as stocks from the same or similar industry group that
have similar market capitalizations and investment characteristics)
("Substitute Securities"). In addition, from time to time adjustments may be
made in the Fund's holdings due to changes in the composition of the S&P 500
Index. The Fund will not adopt a temporary defensive investment posture in
times of generally declining market conditions, and investors in the Fund,
therefore, will bear the risk of such market conditions.
PIC believes that this investment approach will provide an effective
method of tracking the performance of the S&P 500 Index. Nevertheless, PIC
does not expect that the Fund's performance will precisely correspond to the
performance of the S&P 500 Index. The Fund will attempt to achieve a
correlation between its performance and that of the S&P 500 Index of at least
0.95, without taking into account expenses. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when the Fund's net
asset value, including the value of its dividends and capital gains
distributions, increases or decreases in exact proportion to changes in the
S&P 500 Index. PIC will, of course, attempt to minimize any tracking
differential (i.e., the statistical measure of the difference between the
investment results of the Fund and those of the S&P 500 Index). Tracking will
be
4 The Prudential Institutional Fund Prospectus
<PAGE>
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monitored on a daily basis. All tracking maintenance activities will be
reviewed regularly to determine whether any changes in policies or techniques
are necessary. However, in addition to potential tracking differences,
brokerage and other transaction costs, as well as other Fund expenses, may
cause the Fund's return to be lower than the return of the S&P 500 Index.
Consequently, there can be no assurance as to how closely the Fund's
performance will correspond to the performance of the S&P 500 Index.
The Fund intends that at least 80% of the value of its total assets will
be invested in securities included in the S&P 500 Index. The Fund may invest
the balance of its assets in: (i) Substitute Securities; (ii) other
equity-related securities; (iii) obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities; (iv) put and call options on
securities and stock indices; and (v) futures contracts on stock indices and
options thereon.
Options, futures contracts, and options on futures contracts would be
used primarily to hedge the Fund's portfolio to facilitate tracking or to
reduce transaction costs.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental income purposes, the Fund may also: (i)enter
into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; and (ii) lend its portfolio securities. See Other
Investment Practices, Risk Conditions, and Policies of the Funds for a fuller
description of these investment practices and their risks.
International Stock Fund. The International Stock Fund seeks to achieve
long-term growth of capital through investment in equity securities of foreign
companies. Income is a secondary objective.
The Fund will, under normal circumstances, invest at least 65% of the
value of its total assets in common stocks and preferred stocks of issuers
located in at least three foreign countries. The Fund will invest primarily in
seasoned companies (i.e., companies with an established operating record) that
are incorporated, organized, or that do business primarily outside the U.S.
The Fund will invest in securities of such foreign issuers through direct
market purchases on foreign stock exchanges and established over-the-counter
markets as well as through the purchase of ADRs, European Depository Receipts
("EDRs") or other similar securities.
The Fund intends to broadly diversify its holdings among issuers located
in developed and developing countries having national financial markets.
Mercator, the Adviser for the Fund, believes that broad diversification
provides a prudent means of reducing volatility while permitting the Fund to
take advantage of the potentially different movements of major equity markets.
While the Fund may invest anywhere outside the U.S., it expects that most of
its investments will be made in securities of issuers located in developed
countries in North America, Western Europe, and the Pacific Basin. In
allocating the Fund's investments among different countries and geographic
regions, Mercator will consider such factors as: relative economic growth,
expected levels of inflation, government policies affecting business
conditions, and market trends throughout the world. In selecting companies
within those countries and geographic regions, Mercator seeks to identify
those companies that are best positioned and managed to benefit from the
factors listed above.
Investing in securities of foreign issuers generally involves greater
risks than investing in the securities of domestic companies. These risks are
often heightened for investments in emerging or developing countries. See
Other Investment Practices, Risk Conditions, and Policies of the Fund--
Securities of Foreign Issuers for a description of these risks.
The Fund does not currently expect to invest 25% or more of its net
assets in any one country. For temporary defensive purposes, the Fund may
invest in common stocks, preferred stocks and other equity-related securities
of U.S. issuers, without limitation.
The Fund may invest up to 35% of the value of its total assets in: (i)
other equity-related securities of foreign issuers; (ii) common stocks,
preferred stocks and other equity-related securities of U.S. issuers; (iii)
investment grade debt securities, including lower rated securities (securities
rated in the fourth highest rating category by a rating service (i.e., rated
Baa by Moody's or BBB by S&P or, if not rated, determined by Mercator to be of
comparable quality to securities so rated)) of domestic and foreign
corporations, governments, governmental entities, and supranational entities
(such as the Asian Development Bank, the European Coal and Steel Community,
the European Economic Community, and the International Bank for Reconstruction
and Development (the "World Bank")); and (iv) invest in high-quality domestic
money market instruments and short-term fixed income securities. The Fund's
use of money market instruments and short-term debt securities will generally
reflect Mercator's overall measure of optimism relating to the global equity
markets, and the Fund will use such securities to reduce downside volatility
during uncertain or declining market conditions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions or, for incidental income, the Fund may: (i) enter into repurchase
agreements, when-issued, delayed-delivery and forward commitment transactions;
and (ii) lend its portfolio securities. In order to reduce risks associated
with currency fluctuations, the Fund may (i) purchase and sell currency spot
contracts; (ii) purchase and sell currency futures contracts and currency
forward contracts; and (iii) purchase and sell put and call options on
currencies. See Other Investment Practices, Risk Considerations and Policies
of the Funds for a fuller description of these investment practices and their
risks.
Active Balanced Fund. The objective of this Fund is to seek to achieve
total returns approaching equity returns, while accepting less risk than an
all-equity portfolio, through an actively-managed portfolio of equity
securities, fixed income securities, and high quality money market
instruments.
Jennison, the Adviser to the Fund, uses the following ranges as the
normal operating parameters for each type of security to be purchased for the
Fund: (i) 40-75% of the total assets of the Fund will be invested in common
stocks, preferred stocks and other equity-related securities; (ii) 25-60% of
the total assets of the Fund will be invested in investment grade fixed income
securities; and (iii) 0-35% of the total assets of the Fund will be
The Prudential Institutional Fund Prospectus 5
<PAGE>
- -------------------------------------------------------------------------------
invested in money market instruments. Within these parameters, at least 25% of
the Fund's total assets will be invested in fixed income senior securities.
Unlike the Balanced Fund, the Active Balanced Fund's investments will
actively be shifted among these asset classes in order to capitalize on
intermediate term (i.e., 12 to 18 months) valuation opportunities and to
maximize the Fund's total investment return. The equity component of this Fund
will be invested in the common stocks, preferred stocks and other
equity-related securities of companies that are expected to generate superior
earnings growth rates. Jennison believes that carefully selected and
reasonably priced growth stocks will generate superior investment results over
the long term. The fixed income component of this Fund will be invested
primarily in fixed income securities rated in the three highest rating
categories by a rating service (i.e., rated "A" or better by Moody's or S&P
or, if not rated, determined by Jennison to be of comparable quality to
securities so rated). However, the Fund may also invest up to 20% of the fixed
income portion of its portfolio in securities rated in the fourth highest
rating category by a rating service (i.e., rated Baa/BBB (or the equivalent
rating or, if not rated, determined by Jennison to be of comparable quality to
securities so rated)). The weighted average maturity of the fixed income
component of the Fund will normally be between 10 and 25 years. See Other
Investment Practices, Risk Conditions, and Policies of the Funds--Fixed Income
Securities below and Debt Securities in the Statement of Additional
Information for a fuller description of these securities.
Under normal market conditions at least 65% of the value of the Fund's
total assets will be invested according to the above allocations. Within these
allocations, the Fund's assets may be invested as follows: (i) up to 15% of
the Fund's total assets, in common stocks, preferred stocks and other
equity-related securities of foreign issuers; (ii) up to 20% of the Fund's
total assets, in U.S. dollar-denominated investment grade fixed income
securities of foreign issuers; (iii) in mortgage-backed securities; (iv) in
custodial receipts and asset-backed securities; and (v) in obligations issued
or guaranteed by the U.S. Government or its agencies and instrumentalities.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or incidental income purposes, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase
and sell put and call options on securities, stock indices and interest rate
indices; and (iv) purchase and sell futures contracts on stock indices and
interest rate indices and options thereon.
With respect to the fixed income component of the Fund's total assets,
the Fund may: (i) purchase and sell currency spot contracts; (ii) purchase and
sell currency futures contracts and currency forward contracts; and (iii)
purchase and sell put and call options on currencies, in each case to reduce
risks associated with currency fluctuations. See Other Investment Practices,
Risk Conditions, and Policies of the Funds for a fuller description of these
investment practices and their risks.
Balanced Fund. The Balanced Fund seeks to realize long-term total return
consistent with moderate portfolio risk. To achieve its objective, the
Balanced Fund will allocate at least 65% of its total assets among: (i)common
stocks, preferred stocks and other equity-related securities (including ADRs);
(ii) investment grade fixed income securities of intermediate maturities,
including lower rated securities (securities rated in the fourth highest
rating category by a rating service (i.e., rated Baa by Moody's or BBB by S&P
or, if not rated, determined by PIC, the Adviser for the Fund, to be of
comparable quality to securities so rated)); and (iii) high-quality money
market instruments and other short-term investment grade debt securities.
PIC will adjust the mix of investments among these three asset categories
to capitalize on perceived variations in the potential for return resulting
from the interaction of changing economic and financial market conditions,
taking into consideration the risks associated with each type of security. PIC
uses the following ranges as the normal operating parameters for each type of
security to be purchased for the Fund: (i) 25-50% of the Fund's total assets
will be invested in common stocks, preferred stocks and other equity-related
securities (including ADRs); (ii) 30-60% of the Fund's total assets will be
invested in investment grade fixed income securities of intermediate
maturities; and (iii) 0-45% of the Fund's total assets will be invested in
money market instruments. Within these parameters, at least 25% of the Fund's
total assets will be invested in fixed income senior securities. The equity
portion of the Fund will be invested using an approach that combines a value
orientation to stock valuations with an in-depth analysis of individual
companies. Stock prices will be evaluated relative to a company's
profitability, estimated earnings growth, quality of management and other
factors such as underlying asset value and the presence of problems that are
believed to be temporary. While the majority of the Fund's holdings are
expected to be in larger, well-established companies, the Fund may also invest
in the equity securities of smaller companies. Adjustments to the investment
mix of the Balanced Fund normally will be made in a gradual manner over a
period of time, depending on market and economic conditions.
The Fund may also invest up to 35% of the value of its total assets in:
(i)common stocks, preferred stocks and other equity-related securities of
foreign issuers not traded in the U.S. or denominated in U.S. dollars;
(ii)investment grade fixed income securities of foreign issuers;
(iii)mortgage-backed securities; (iv) custodial receipts and asset-backed
securities; and (v) obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities.
To facilitate the Fund's investment program, the Fund may: (i) purchase
and sell put and call options on securities, stock indices and interest rate
indices; (ii) purchase and sell futures contracts on securities, stock indices
and interest rate indices, and (iii) enter into interest rate swap
transactions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental income, the Fund may also: (i) enter into
repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (ii) lend its portfolio securities.
With respect to the equity component of the Fund's total assets, the Fund
may: (i) purchase and sell currency spot contracts; (ii) purchase and sell
currency futures contracts and currency forward contracts; and (iii) purchase
and sell put and call options on currencies, in each case to reduce
6 The Prudential Institutional Fund Prospectus
<PAGE>
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risks associated with currency fluctuations. See Other Investment Practices,
Risk Conditions, and Policies of the Funds for a fuller description of these
investment practices and their risks.
Income Fund. The Income Fund seeks a high level of income over the longer
term while providing reasonable safety of capital by investing in securities
with a low level of default risk, with the effect of seeking preservation of
capital. To achieve its objective, the Fund will invest, under normal
circumstances, at least 65% of the value of its total assets in fixed income
securities. Such securities include: (i) corporate debt obligations; (ii)
mortgage-backed securities; (iii) custodial receipts and asset-backed
securities; (iv) U.S. Government obligations (such as U.S. Treasury bills, notes
and bonds), and securities issued by its agencies or its instrumentalities; and
(v) U.S. dollar-denominated investment grade fixed income securities of foreign
issuers. The Fund will invest primarily in fixed income securities rated in the
three highest rating categories by a rating service (i.e., rated "A" or better
by Moody's or S&P or the equivalent rating or, if not rated, determined by PIC,
the Adviser to the Fund, to be of comparable quality to securities so rated).
However, the Fund may also invest up to 20% of its portfolio in securities rated
in the fourth highest rating category by a rating service (i.e., rated Baa/BBB
(or the equivalent rating or, if not rated, determined by PIC to be of
comparable quality to securities so rated)).
The Fund has no maturity restrictions. However, PIC anticipates that the
securities in which the Fund will invest will primarily be intermediate to
long-term debt securities having an average maturity of between 5 and 20 years.
Movements in interest rates typically have a greater effect on the price of
longer-term bonds than shorter-term bonds. Normally, the value of the Fund's
investments will vary inversely with changes in interest rates. As interest
rates rise, the value of the Fund's investments will tend to decline and, as
interest rates fall, the value of the Fund's investments will tend to increase.
See Other Investment Practices, Risk Conditions, and Policies of the
Funds--Fixed Income Securities below and Debt Securities in the Statement of
Additional Information for a fuller description of debt securities and their
risks.
To facilitate the Fund's investment program, the Fund may also:
(i)purchase and sell put and call options on securities and interest rate
indices; (ii) purchase and sell futures contracts on securities and interest
rate indices; (iii) enter into interest rate swap transactions; and (iv)
purchase and sell non-U.S. dollar denominated investment grade fixed income
securities of foreign issuers.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, the Fund may also: (i) enter into
repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (ii) lend its portfolio securities. See Other Investment
Practices, Risk Conditions, and Policies for a fuller description of these
securities and investment techniques.
Money Market Fund. The Money Market Fund seeks to achieve high current
income, preservation of principal, and maintenance of liquidity. To achieve
its objectives, the Fund will invest in a diversified portfolio of
high-quality domestic and U.S. dollar-denominated foreign money market
instruments that present minimal credit risks and which, at the time of
acquisition, are eligible securities. Eligible securities include securities
or issuers of securities rated in one of the two highest credit categories for
short-term debt obligations assigned by any two nationally recognized
statistical rating organizations ("NRSROs"), or by one NRSRO, if only one has
rated the money market securities ("Requisite NRSROs") or, if unrated, are of
comparable investment quality. The Money Market Fund will invest at least 95%
of its total assets in eligible securities that are rated within the highest
rating category for short-term debt obligations by the Requisite NRSROs or
unrated securities of comparable investment quality. The Fund may also invest
up to 50% of the value of its total assets in U.S. dollar-denominated
short-term securities of foreign issuers.
The eligible money market securities in which the Fund may invest
include: (i) short-term obligations of the U.S. Government, its agencies, and
instrumentalities; (ii) short-term obligations of banks and savings and loan
associations, including certificates of deposit, banker's acceptances, and
time deposits; (iii) short-term corporate obligations, including notes and
bonds with remaining maturities of 397 days or less; (iv) commercial paper
(unsecured promissory notes having maturities of 9 months or less) issued by
corporations and finance companies; (v) repurchase agreements; and (vi) U.S.
dollar-denominated obligations of foreign issuers. Certain of these money
market securities may have adjustable rates of interest with periodic demand
features.
The Fund will invest in eligible money market securities maturing in 397
days or less and will maintain a dollar-weighted average portfolio maturity of
90 days or less. These practices are designed to minimize any price
fluctuation in the Fund's portfolio securities. The Fund seeks to maintain a
constant net asset value of $1.00 per share, although in certain circumstances
this may not be possible.
PIC, the Adviser for the Fund, will actively manage the Fund, adjusting the
composition of investments and the average maturity of the Fund's portfolio
according to its outlook for short-term interest rates. During periods of rising
interest rates, a shorter average maturity may be expected, while a longer
maturity may be more appropriate when interest rates are falling.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, the Fund may (i) enter into repurchase
agreements, when-issued, delayed-delivery and forward commitment transactions
and (ii) lend its portfolio securities. See Other Investment Practices, Risk
Conditions, and Policies of the Funds for a fuller description of these
investment practices and their risks.
RISK FACTORS
As discussed above under the section entitled The Funds, an investment in
each Fund is subject to certain risks as a result of the particular investment
practices and policies followed by the Fund. For a fuller description of the
types of securities in which each of the Funds may invest, the investment
techniques each Fund may employ and the risks associated with these
investments and techniques, see the section entitled Other Investment
Practices, Risk Conditions and Policies of the Funds that begins on page 14.
For a discussion of some of the additional risks associated with
investment in the Funds generally, see the section entitled Other
Considerations that begins on page 12.
The Prudential Institutional Fund Prospectus 7
<PAGE>
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Management of the Company
The Manager. Prudential Institutional Fund Management, Inc. (the "Manager")
is the Manager of the Company. The Manager, located at 30 Scranton Office Park,
Moosic, Pennsylvania, 18507-1789, is an indirect wholly-owned subsidiary of The
Prudential Insurance Company of America ("The Prudential"), one of the largest
diversified insurance and financial services institutions in the world. The
Manager was incorporated on May 6, 1992 under the laws of the State of
Pennsylvania. Although the Manager has limited experience in managing assets of
mutual funds, its management has substantial experience in the mutual fund
industry and utilizes the extensive investment resources of The Prudential and
its affiliates. See Manager in the Statement of Additional Information.
Subject to the supervision and direction of the Company's Board of
Trustees (the "Board"), the Manager provides a continuous investment program
for the Company, monitors each Adviser's investment performance, and evaluates
and recommends whether each Adviser's contract should be renewed, modified, or
terminated. The Manager also supervises all matters relating to the Company's
operations and business affairs and may provide certain of the special
processing services described below.
For the period from commencement of operations for each Fund to September
30, 1993, the total expenses (annualized), net of expense subsidy, as a
percentage of average daily net assets of the Funds' shares, were 1.00% for the
Growth Fund, .60% for the Stock Index Fund, 1.60% for the International Stock
Fund, 1.00% for the Active Balanced Fund, 1.00% for the Balanced Fund, .70% for
the Income Fund and .60% for the Money Market Fund. See Financial Highlights.
Each Fund pays the Manager a fee for its services provided to the Fund
that is computed daily and paid monthly. For the period from commencement of
Fund operations through September 30, 1993, the Manager was paid a management
fee at the annual rate specified below, expressed as a percentage of the
Fund's average daily net assets:
Management Fee
Fund (Before Reduction)*
............................................................
Growth Stock Fund .70%
............................................................
Stock Index Fund .40%
............................................................
International Stock Fund 1.15%
............................................................
Active Balanced Fund .70%
............................................................
Balanced Fund .70%
............................................................
Income Fund .50%
............................................................
Money Market Fund .45%
............................................................
- --------------
* The Management Fee paid by the International Stock Fund is higher than that
charged to most investment companies. As a result of the limitation of
expenses agreed to by the Manager for the period ending September 30, 1996,
the Manager did not retain any management fees for the Stock Index Fund,
the Active Balanced Fund, the Income Fund and the Money Market Fund for the
period from commencement of operations to September 30, 1993.
The Advisers. The Manager has entered into Sub-Advisory Agreements (each,
an "Advisory Agreement") with PIC, Jennison and Mercator (each, an "Adviser")
under which each furnishes investment advisory services in connection with the
management of the various Funds. The Manager (not the Funds) compensates each
Adviser for its services. Under the Advisory Agreements, each Adviser, subject
to the supervision of the Manager and the Board, is responsible for managing
the assets of the respective Funds in accordance with their investment
objectives, investment programs, and policies. Each Adviser determines what
securities and other instruments are purchased and sold for its respective
Fund and is responsible for obtaining and evaluating financial data relevant
to each Fund. The Manager will reimburse PIC for the reasonable costs and
expenses it incurs in providing services to the Funds and will pay Jennison
and Mercator a fee as compensation for the performance of these services.
The Prudential Investment Corporation ("PIC"), 751 Broad Street, Newark, New
Jersey 07102, serves as Adviser to the Stock Index Fund, the Balanced Fund, the
Income Fund, and the Money Market Fund. PIC also invests available cash balances
for all of the Funds which it may do through a joint repurchase agreement
account. PIC also administers the securities lending program for the Funds.
Prudential Diversified Investment Strategies (PDI Strategies), a unit of PIC, is
responsible for the day-to-day management of the Balanced Fund. PDI Strategies
employs a team approach to the management of the portfolio and has managed the
portfolio of the Fund since its commencement. Anthony A. Rodriguez, a Vice
President of Prudential Investment Advisers (PIA), a unit of PIC, has been
responsible for the day-to-day management of the bond portion of the Balanced
Fund portfolio since July 1994 and has been employed by PIC as a portfolio
manager since 1988. Anthony Gleason, Vice President of PIA, has been responsible
for the day-to-day management of the equity portion of the Balanced Fund
portfolio since its inception in 1992 and has been employed by PIC as a
portfolio manager since 1986. PDI Strategies is also responsible for the
day-to-day management of the Stock Index Fund.
Prudential Fixed Income Advisers (PFIA), a unit of PIC, is responsible for the
day-to-day management of the Income Fund. Robert Tipp, a Managing Director and
Senior Portfolio Manager of PFIA, and Kay Willcox, a Managing Director and
Senior Portfolio Manager of PFIA are responsible for the day-to-day management
of the portfolio of the Income Fund. Mr. Tipp has managed the portfolio of the
Income Fund since its inception in March, 1993 and has been a fixed income
manager with PIC since 1991. Prior to joining PIC, Mr. Tipp was the Director of
the Portfolio Strategies Group at The First Boston Corporation. Ms. Willcox has
managed the portfolio of the Income Fund since November 1993 and has been a
portfolio manager at PIC since 1987.
Prudential Liquidity Asset Management, a unit of PIC, is responsible for
the day-to-day management of the Money Market Fund.
PIC, a wholly-owned subsidiary of The Prudential, is a registered
investment adviser and a New Jersey corporation with $246 billion in assets
under management as of June 30, 1993. PIC serves as adviser to institutional
investors, including The Prudential, and various other mutual funds.
Jennison Associates Capital Corp. ("Jennison"), 466 Lexington Avenue, New
York, New York 10017, serves as Adviser to the Growth Stock Fund and the
Active Balanced Fund.
8 The Prudential Institutional Fund Prospectus
<PAGE>
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David Poiesz, a Director and Senior Vice President of Jennison, is responsible
for the day-to-day management of the portfolio of the Growth Stock Fund. Mr.
Poiesz has managed the portfolio of the Growth Stock Fund since its inception in
November, 1992 and has been an equity analyst since 1982, and an equity manager
since 1991, with Jennison.
Bradley L. Goldberg, a Director and Senior Vice President of Jennison, is
responsible for the day-to-day management of the portfolio of the Active
Balanced Fund. Mr. Goldberg has managed the portfolio of the Active Balanced
Fund since its inception in January 1993 and has been employed as an equity
manager with Jennison since 1974.
Jennison, a wholly-owned subsidiary of The Prudential, is a registered
investment adviser and a New York corporation with $23.1 billion in assets
under management, as of December 31, 1993. Jennison serves as adviser to
various institutional investors and other mutual funds.
Mercator Asset Management, Inc. ("Mercator"), 2400 East Commercial
Boulevard, Fort Lauderdale, Florida 33308, serves as Adviser to the
International Stock Fund.
Peter F. Spano, a Managing Director of Mercator, is responsible for the
day-to-day management of the portfolio of the International Stock Fund. Mr.
Spano has managed the portfolio of the International Stock Fund since its
inception in November, 1992 and has been employed as a portfolio manager with
Mercator since its founding in 1984.
Mercator, an indirect wholly-owned subsidiary of The Prudential, is a
registered investment adviser and a Florida corporation with $1.8 billion in
assets under management as of December 31, 1993. Mercator serves as adviser to
various institutional investors and other mutual funds.
The Administrator, Transfer Agent and Dividend Disbursing Agent. The
Company has entered into an administration service agreement (the
"Administration Agreement"), with Prudential Mutual Fund Management, Inc.
("PMF"), One Seaport Plaza, New York, New York, 10292, which provides that
PMF, a Delaware corporation and an indirect wholly-owned subsidiary of The
Prudential, will furnish to the Company such services as the Company may
require in connection with administration of the Company's business affairs.
Under the Administration Agreement, the Company will pay PMF a monthly fee at
an annual rate of .17% of the average daily net assets of the Company up to
$250 million and .15% of the Company's average daily net assets in excess of
$250 million. PMF will also provide the Company with transfer agent and
dividend disbursing services for no additional fee, through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. ("PMFS"), Raritan Plaza One,
Edison, New Jersey 08837. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906. PMF will reimburse PMFS for certain of the
out-of-pocket expenses PMFS may incur in providing these services and the
Company will reimburse PMF for those out-of-pocket expenses.
The Distributor. Prudential Retirement Services, Inc. (the
"Distributor"), 751 Broad Street, Newark, New Jersey 07102, an affiliate of
the Manager and a corporation organized under the laws of Delaware, has
entered into a Distribution Agreement (the "Distribution Agreement") with the
Company pursuant to which it will serve as the Distributor of the Company's
shares. Potential investors may be introduced to the Distributor, and persons
who introduce investors may be compensated for such introductions.
The Prudential Institutional Fund Prospectus 9
<PAGE>
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Investors Guide to Services
Investment in the Company and Special Processing. As an institutional
fund, shares are offered exclusively to retirement programs and arrangements
("Programs") through their plan sponsors, to Individual Retirement Accounts
and to certain institutional investors. Sponsors of a Program or their agents
are referred to as "Program Sponsor(s)" or "Program Administrator(s)" and
individual employees participating in a Program are referred to as
"Participant(s)," and individual investors who separate from a program are
referred to as "Continuing Participant(s)." Endowments, foundations, insurance
companies and other institutional investors are referred to as "Other
Institutional Investors". The term "shareholders" refers to each or all of
these categories as well as to Individual, Retirement Accounts, as
appropriate.
Investments by Participants are made through their Program Sponsor's
recordkeeper, who is responsible for transmitting all orders for the purchase,
redemption or exchange of Company shares. The availability of each Fund, and
the procedures for investing, depend upon the provisions of the Program and
whether the Program Sponsor has contracted with the Company or its transfer
agent for special processing services, including subaccounting. Continuing
Participants, other institutional investors and Individual Retirement Account
investors must arrange for services through Prudential Institutional Fund
Management, Inc., the Manager, by contacting them at 30 Scranton Office Park,
Moosic, PA 18507-1789. The following services are offered specifically to
sponsors of qualified retirement programs.
Purchasing Shares. Shares of a Fund may be purchased through a Program
Sponsor's recordkeeper or directly from the Company's Transfer Agent, PMFS.
The purchase price for shares of a Fund will be the net asset value per share
next determined following receipt of a purchase order by the Program Sponsor's
recordkeeper or PMFS. A purchase order must include the information necessary
to determine the proper share allocation for each Participant. In addition,
the Manager may determine, at its own discretion, to require the Program
Sponsor's recordkeeper to deliver to PMFS the funds for initial investment
prior to accepting any purchase order. Plans should determine, prior to
investing in the Funds, whether the Manager will require the delivery of funds
for the initial investment prior to accepting a purchase order. The Company
reserves the right to reject any purchase order (including an exchange order)
or to suspend or modify the continuous offering of its shares.
The Program Sponsor and its recordkeeper and PMFS are responsible for
forwarding payment promptly to the Company. Except where funds are received
prior to the opening of the account, the Company reserves the right to cancel
any purchase order for which payment has not been received by the fifth
business day following the investment. On behalf of the Company, the Manager,
in its sole discretion, may require assurances from the Program Sponsor and
its recordkeeper concerning timely payment of funds and payment of damages for
failure to deliver funds and purchase orders on a timely basis.
The Company may also determine to accept eligible securities as payment
for a Program's initial investment in a Fund. Eligible securities include any
security which a Fund has authority to purchase, consistent with its
investment restrictions and operating policies as set forth in this Prospectus
and the Statement of Additional Information, and which the Company otherwise
agrees to accept. Acceptance of such securities is at the absolute discretion
of the Company, and the Company may refuse to accept any securities at any
time. Eligible securities are valued using the same methods the Fund uses to
value its portfolio securities.
Redemptions. Requests to redeem shares where the proceeds are not
immediately invested in shares of another Fund (see the section entitled
"Exchange Privilege" below) must be made in writing (or by such other means as
agreed upon in advance by the Program Sponsor's recordkeeper and the Program
Administrator) to the Program Sponsor's recordkeeper. Requests for the
redemption of shares are considered received when all required information and
any necessary signatures have been provided. The Company generally will redeem
for cash all full and fractional shares. The redemption price is the net asset
value per share next determined after receipt by the Company of proper notice
of redemption. The payment of redemption proceeds will be made by check (or at
the discretion of the Program Recordkeeper, by electronic credit to the
Participant's account at a financial institution). Unless extraordinary
circumstances exist, the payment of proceeds will be made within seven days of
the receipt of the request for redemption. The Company has reserved the right
to redeem shares in excess of $250,000 or 1% of the net asset value of each
Fund during any 90-day period for any one shareholder by "distribution in
kind" of securities (instead of cash) from such Funds. The Company does not
intend to exercise this right except in special circumstances when it
determines that it is in the interest of the Company and its shareholders to
have the redeeming shareholder incur the transaction costs of disposing of
such securities. The right of redemption may be suspended under unusual
circumstances, as permitted by law. If shares to be redeemed were purchased
with clearing house funds, the Company reserves the right to delay payment
until it is reasonably sure the funds have been credited to its account. If
shares were purchased by personal, corporate, or government check, proceeds
may be delayed until the check has been honored, but in no event more than 15
calendar days from the date of receipt of the check. This procedure does not
apply to shares purchased by wire payment. Prior to the time the redemption is
effective, dividends on such shares will accrue and be payable, and you will
be entitled to exercise all other rights of beneficial ownership.
Exchange Privilege. Shares of each Fund may be exchanged for shares of
any other available Fund (depending upon the provisions of the Program) by
written, telecopy, telephone or electronic exchange request through the
Program's recordkeeper at the net asset value next determined after receipt by
the Funds' Transfer Agent or the Program Sponsor's record- keeper of an
exchange request in good order. Exchanges are currently permitted at no
charge, subject to any minimum investment requirements, or any general
limitations of the Fund into which an exchange is sought. Currently, there are
no such requirements or limitations. The exchange privilege may be modified or
withdrawn by the Company upon 60 days' notice to shareholders.
10 The Prudential Institutional Fund Prospectus
<PAGE>
Signatures. When a Program provides that redemption may only be made by
written request, the signature on a written redemption request must be exactly
as shown on the enrollment form. In addition to a Program Participant's
signature, a written request must include all other signatures required by the
Program and federal law.
Telephone Requests. Certain Programs may offer telephone and telecopy
exchange privileges to participants who have completed a telephone exchange
authorization form. Eligible participants may obtain the telephone exchange
authorization form by contacting their Program Sponsor or Program
Recordkeeper. Telephone and telecopy exchange privileges are available only if
the Program Sponsor has so elected and only in states where these exchanges
may legally be made. The authorization form and any limitations thereunder are
designed to minimize unauthorized exercise of these privileges. During times
of extraordinary economic or market changes, telephone privileges or
telecopied instructions may be difficult to implement.
Other Services
/ / Reinvestment of Distributions. Income dividends and capital gains
distributions with respect to a particular Fund are declared in cash and
automatically reinvested in additional shares of that Fund. Shares of
each Fund, including shares received as dividends, may be redeemed for
cash at any time. See Investors Guide to Services for a further
description of share redemptions.
/ / Systematic Withdrawal Plan. A Systematic Withdrawal Plan may be
established by the Program Administrator subject to the requirements of
the Program, federal tax laws, and the Company's applicable procedures.
The shareholder's interest in each Fund designated for systematic
withdrawals or in other programs for which the Manager or its affiliates
act as investment manager, must have a minimum value of $15,000 when the
Systematic Withdrawal Plan begins, unless used for the purpose of
satisfying minimum distribution rules. The proceeds from scheduled
redemption of shares are forwarded to the shareholder on a monthly,
quarterly, semi-annual or annual basis. Payments are in equal dollar
amounts and must be at least $250. A fee may be charged for accommodating
wire transfer requests. For the protection of shareholders and the
Company, wiring instructions must be on file prior to executing any
request for the wire transfer of systematic withdrawal proceeds. A
shareholder may change the bank account previously designated by written
request, including appropriate signature guarantees, a copy of any
applicable corporate resolution or other relevant documentation.
- -------------------------------------------------------------------------------
FURTHER INFORMATION REGARDING THESE SERVICES MAY BE OBTAINED FROM A
SERVICE REPRESENTATIVE. EACH OF THESE SERVICES IS SUBJECT TO THE REQUIREMENTS
AND LIMITATIONS OF THE PROGRAM AND MAY HAVE TAX CONSEQUENCES THAT DEPEND ON
THE INDIVIDUAL TAX STATUS OF THE RECIPIENT.
The Prudential Institutional Fund Prospectus 11
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Other Considerations
Net Asset Value. The net asset value for each Fund is determined by
subtracting from the value of all securities, cash and other assets of each
Fund, the amount of its liabilities (including accrued expenses and dividends
payable), and dividing the result by the number of outstanding shares of that
Fund. For valuation purposes, quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents. The Board has fixed the
specific time of day for the computation of the net asset value of all the
Funds (except the Money Market Fund) to be as of 4:15 p.m., New York time. The
Money Market Fund shall calculate net asset value as of 4:30 p.m., New York
time.
Fund securities are valued based on market quotations, or, if not readily
available, at fair market value as determined in good faith under procedures
established by the Company's Board. See Net Asset Value in the Statement of
Additional Information.
Each Fund computes its net asset value once daily on business days. Business
days are days when the New York Stock Exchange ("NYSE") is open for trading
except on days on which no orders to purchase, sell, or redeem shares have been
received by the Company or days on which changes in the value of the Company's
portfolio securities do not affect net asset value. The NYSE is closed on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Money Market Fund determines the value of its portfolio securities by
the amortized cost method. This method involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any
discount or premium regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Money Market Fund would
receive if it sold the instrument. During these periods, the yield to an
existing shareholder may differ somewhat from that which could be obtained if
the Fund marked its portfolio securities to market each day. The Board has
established procedures designed to stabilize, to the extent reasonably
possible, the net asset value of the shares of the Money Market Fund at $1.00
per share. The Money Market Fund seeks to maintain a $1.00 share price at all
times. To achieve this, the Money Market Fund purchases only securities with
remaining maturities of thirteen months or less and limits the dollar-weighted
average maturity of its portfolio to 90 days or less. The Money Market Fund
cannot guarantee a $1.00 share price, but the Fund's maturity standards and
investments solely in high quality money market instruments minimize any price
decreases or increases.
Portfolio Transactions. The Funds have no obligation to do business with
any broker-dealer or group of broker-dealers in executing transactions in
securities. In placing orders, the Advisers are subject to the Company's
policy to seek the most favorable price and efficient execution taking into
account such factors as price (including the applicable commission or dealer
spread), size, type, and difficulty of the transaction, and the firm's general
execution and operating facilities. The Company has authorized each Adviser to
pay higher commissions in recognition of brokerage services which, in an
Adviser's opinion, are necessary to achieve better execution, provided the
Adviser believes this to be in the best interest of its Fund. The Advisers may
also rank broker-dealers based on the value of their research services and
include such ranking as a selection factor.
The Advisers, subject to seeking best price and execution, are authorized
to cause a Fund to pay broker-dealers that furnish brokerage and research
services (as defined by Section 28(e) of the Securities Exchange Act of 1934,
as amended (the "1934 Act")) a higher commission than another broker-dealer
that does not furnish such brokerage and research services might charge. The
Advisers must regard such higher commissions as reasonable in relation to the
brokerage and research services provided, viewed in terms of each Adviser's
responsibilities to the Fund or other accounts, if any, as to which it
exercises investment discretion.
Certain of the Advisers' other accounts have investment objectives and
programs that are similar to the Funds they advise. Accordingly, occasions may
arise when an Adviser engages in simultaneous purchase and sale transactions
of securities that are consistent with the investment objectives and programs
of the Fund it advises and other accounts. On those occasions, the Advisers
will allocate purchase and sale transactions in an equitable manner according
to written procedures approved by the Board. Such procedures may, in
particular instances, be either advantageous or disadvantageous to a Fund.
It is expected that Prudential Securities Incorporated ("PSI"), a
registered broker-dealer, which is an indirect wholly-owned subsidiary of The
Prudential, may act as broker for the Company, in conformity with the
securities laws and rules thereunder. In order for PSI to effect any portfolio
transactions for the Company on an exchange or board of trade, the commissions
received by PSI must be reasonable and fair compared to the commissions paid
to other brokers in connection with comparable transactions involving similar
securities or futures being purchased or sold on an exchange or board of trade
during a comparable period of time. This standard would allow PSI to receive
no more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate
arm's-length transaction. The Board has approved procedures for evaluating the
reasonableness of commissions paid to PSI and periodically reviews these
procedures.
The Company does not market its shares through intermediary brokers or
dealers; therefore, it is not the Company's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be made
through such firms. However, the Advisers may place portfolio orders with
qualified broker-dealers who recommend the Company to clients, and may, when a
number of brokers and dealers can provide best price and execution on a
particular transaction, consider such recommendations by a broker or dealer in
selecting among broker-dealers.
Distributions. Dividends and distributions of each Fund are declared in
cash and automatically reinvested in additional shares of the Fund. While
shareholders may not elect to receive dividends and distributions in cash, the
same effect may be achieved at any time by redeeming shares of the Fund. The
Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss),
daily and distribute such dividends monthly. Each
12 The Prudential Institutional Fund Prospectus
<PAGE>
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other Fund will declare and distribute a dividend of its net investment
income, if any, at least annually. Except for the Money Market Fund, each Fund
will declare and distribute its net capital gains, if any, at least annually.
Distributions of income dividends and capital gains distributions of each Fund
are made on the payment date and reinvested at the per share net asset value
as of the record date or such other date as the Board may determine. On the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the amount of the distribution).
Taxes. The following discussion is only a brief summary of some of the
important tax considerations affecting the Company, its Funds and its
shareholders. For further tax-related information see Taxes in the Statement
of Additional Information. No attempt is made to present a detailed
explanation of all federal, state, and local income tax considerations, and
this discussion as well as that in the Statement of Additional Information are
not intended as a substitute for careful tax planning. Accordingly, investors
are urged to consult their own tax advisors with specific reference to their
own tax situation.
Tax Consequences to the Funds. Each Fund is treated as a separate entity
for federal income tax purposes, and thus the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to regulated
investment companies generally (subchapter M of the Code) are applied to each
Fund separately, rather than to the Company as a whole. Each Fund intends to
qualify as a regulated investment company under subchapter M. If so qualified,
each Fund is not subject to federal income taxes with respect to net
investment income and net realized capital gains, if any, that are distributed
to its shareholders, provided that the Fund distributes each year at least 90%
of its net investment income, (including net short term capital gains), and
meets certain other requirements set forth in the Code. Each Fund would be
subject to a 4% nondeductible excise tax on such Fund's taxable income to the
extent such Fund did not meet certain distribution requirements by the end of
each calendar year. Each Fund intends to make sufficient distributions to
avoid application of this excise tax.
Tax Consequences to the Shareholders. The Company's present intention is
to offer the Funds to qualified retirement programs, Continuing Participants,
and Other Institutional Investors.
Distributions from a qualified retirement program or other non-qualified
arrangements to a Participant or beneficiary will be subject to the provisions
in the Code and Treasury Regulations relating to taxation of such
distributions. Because the effect of these rules varies greatly with
individual situations, potential investors are urged to consult their own tax
advisors.
Certain investments of the Funds, such as Passive Foreign Investment
Companies and zero coupon instruments involve special tax issues. The
Statement of Additional Information contains a general discussion of these
matters.
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Performance and Yield Information
Money Market Fund. From time to time quotations of the Money Market
Fund's "yield" and "effective yield" may be included in marketing material and
communications to shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of
the Fund refers to the net income generated by an investment in the Fund over
a specified seven-day period. This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is expressed similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. "Yield" and "effective yield"
for the Fund will vary based on changes in market conditions, the level of
interest rates and the level of the Fund expenses.
Other Funds. From time to time a Fund, other than the Money Market Fund,
may publish its yield, average annual total return and/or its cumulative total
return in its marketing material and communications to shareholders. The yield
of a Fund will be calculated by dividing the net investment income per share
during a recent 30-day period by the maximum offering price (i.e., net asset
value) per share of the Fund on the last day of the period. The results are
compounded on a bond equivalent (semi-annual) basis and then annualized. A
Fund's average annual total return is determined by computing the annual
percentage change in value of $1,000 invested at the maximum public offering
price (i.e., net asset value) for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value.
Investors should note that the investment results of a Fund will
fluctuate over time, and any presentation of a Fund's yield or average annual
total return for any prior period should not be considered as a representation
of what an investment may earn or what an investor's yield or total return may
be in any future period. Because the method of calculating yield differs from
the methods used for other accounting purposes, a Fund's yield may not equal
the distributions to shareholders or the income reported in a Fund's financial
statements. See Performance and Yield Information in the Statement of
Additional Information for recent performance and yield information.
Performance Information. Comparative performance information may be used
from time to time in advertising the Company's shares, including, but not
limited to, data from Lipper Analytical Services, Inc., the Standard & Poor's
500 Composite Stock Price Index, the Salomon Brothers Broad Investment Grade
Bond Index, the Dow Jones Industrial Average, the Donoghue Money Market
Averages, Morningstar, Inc., the Salomon Brothers 1-3 years Treasury Index,
the Morgan Stanley EAFE Index, the Lehman Brothers Aggregate Index or
Government/Corporate Index and
The Prudential Institutional Fund Prospectus 13
<PAGE>
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other commonly used indices or industry publications. The Fund's annual report
to Shareholders for its fiscal year ended September 30, 1993 contains
additional performance information and will be made available to prospective
investors without cost.
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Other Investment Practices, Risk Conditions, and Policies of the Funds
The investment objective(s) of each Fund are fundamental. Fundamental
objectives, policies and restrictions may be changed only with the approval of
a "majority of the outstanding voting securities" of that Fund. Each Fund's
investment program, unless otherwise specified, is not fundamental and may be
changed by the Board without shareholder approval. A "majority of the
outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding shares. Each Fund's investment program is subject to further
restrictions as described in the Statement of Additional Information.
Each Fund may hold a portion of its assets in money market instruments in
amounts designed to pay expenses, to meet anticipated redemptions or pending
investments in accordance with its objectives and policies. These instruments
may be purchased on a forward commitment, when-issued or delayed-delivery
basis. In addition, each Fund (except for the Stock Index Fund and the Money
Market Fund) may for temporary defensive purposes invest, without limitation,
in high-quality money market instruments. Each Fund, except the Money Market
Fund, may also purchase non-investment grade fixed income securities and
retain investment grade fixed income securities which have been downgraded to
non-investment grade provided that no more than 5% of the Fund's net assets is
invested in non-investment grade fixed income securities, which are considered
to be high risk securities. See Fixed Income Securities below and Debt
Securities in the Statement of Additional Information for a fuller description
of these securities.
Each Fund, consistent with its investment objective(s), may invest in one
or more of the types of securities described below and may utilize a variety
of the investment techniques described below. These securities and investment
techniques are also described in the Statement of Additional Information.
U.S. Government Securities. Each Fund may invest in fixed income
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Obligations of the U.S. Government consist of various types
of marketable securities issued by the U.S. Treasury, i.e., bills, notes and
bonds, and are direct obligations of the U.S. Government. Obligations of
agencies and instrumentalities of the U.S. Government are not direct
obligations of the U.S. Government and are either: (i) guaranteed by the U.S.
Treasury (e.g., Government National Mortgage Association ("GNMA")
mortgage-backed securities); (ii) supported by the issuing agency's or
instrumentality's right to borrow from the U.S. Treasury at the discretion of
the U.S. Treasury (e.g., Federal National Mortgage Association ("FNMA")
Discount Notes); or (iii) supported by only the issuing agency's or
instrumentality's credit (e.g., each of the Federal Home Loan Banks).
Repurchase Agreements. Each Fund may utilize repurchase agreements
through which it may purchase a security (the "underlying security") from a
creditworthy domestic securities dealer or bank that is a member of the
Federal Reserve System which agrees to repurchase the underlying security at a
mutually agreed upon time and price. In a repurchase transaction, the
underlying security is held by the custodian for the applicable Fund through
the federal book entry system as collateral and marked-to-market on a daily
basis to ensure full collateralization of the repurchase agreement. For the
Money Market Fund, the underlying security must either be a U.S. Government
security or a security rated in the highest rating category by the requisite
NRSROs and must be determined to present minimal credit risks. In the event of
bankruptcy or default of certain sellers of repurchase agreements, the Funds
could experience costs and delays in liquidating the underlying security held
as collateral and might incur a loss if such collateral declines in value
during this period. Each Fund may participate in a joint repurchase account
managed by PIC.
Equity-Related Securities. Each Fund (except for the Income Fund and the
Money Market Fund) may invest in equity-related securities. Equity-related
securities are common stock, preferred stock, rights, warrants and debt
securities or preferred stock which are convertible or exchangeable for common
stock or preferred stock.
Fixed Income Securities. Fixed income securities are considered
high-quality if they are rated at least AA/Aa by S&P or by Moody's or an
equivalent rating by any NRSRO or, if unrated, are determined to be of
comparable investment quality by the Investment Adviser. High-quality fixed
income securities are considered to have a very strong capacity to pay
principal and interest. Fixed income securities are considered medium quality
if they are rated, for example, at least BBB/Baa by S&P or by Moody's or an
equivalent rating by any NRSRO or, if not rated, are determined to be of
comparable investment quality by the Adviser. Medium quality fixed income
securities are regarded as having an adequate capacity to pay principal and
interest. Securities rated in the lowest category of investment grade debt
(i.e., BBB by S&P or Baa by Moody's) may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than is the
case with higher grade bonds.
Investment grade fixed income securities are securities rated in the four
highest rating categories by a rating service (BBB or better by S&P or Baa or
better by Moody's) or an equivalent rating by any NRSRO or, if not rated, are
deemed by the applicable Adviser to be of comparable investmentquality.
Non-investment grade securities are rated lower than BBB/Baa (or an
equivalent rating by any NRSRO or, if not rated, are deemed by the applicable
Adviser to be of comparable investment quality) and are commonly referred to
as high risk or high yield securities. High yield securities are generally
riskier than higher quality securities and are subject to more credit risk,
including risk of default, and volatile than higher quality securi-
14 The Prudential Institutional Fund Prospectus
<PAGE>
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ties. In addition, such securities may have less liquidity and experience more
price fluctuation than higher quality securities. See the Appendix to the
Statement of Additional Information regarding Description of Corporate Bond
Ratings.
The maturity of debt securities may be considered long (ten plus years),
intermediate (three to ten years) or short term (three years or less). In
general, the principal values of longer-term securities fluctuate more widely
in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
debt securities, while an increase in interest rates generally reduces their
value.
Convertible Securities, Warrants and Rights. A convertible security is a
bond, debenture, corporate note, preferred stock or other similar security
that may be converted into or exchanged for a prescribed amount of common
stock or other equity security of the same or a different issuer within a
particular period of time at a specified price or formula. A warrant or right
entitles the holder to purchase equity securities at a specific price for a
specific period of time.
Segregated Accounts. Each Fund will establish a segregated account with
its Custodian in which it will maintain cash, U.S. Government securities or
other liquid high-grade debt obligations equal in value to its obligations in
respect of potentially leveraged transactions including, forward contracts,
when-issued and delayed-delivery securities, repurchase and reverse repurchase
agreements, forward rolls, dollar rolls, futures contracts, written options,
options on futures contracts (unless otherwise covered) and interest rate
swaps. The assets deposited in the segregated account will be marked-to-market
daily.
Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements. The Income
Fund and the Balanced Fund may each commit up to 33 1/3% of the value of its
total assets to investment techniques such as dollar rolls, forward rolls and
reverse repurchase agreements. The Growth Stock Fund, Stock Index Fund,
International Stock Fund, Active Balanced Fund and Money Market Fund may each
commit up to 20% of their net assets to these techniques. A forward roll is a
transaction in which a Fund sells a security to a financial institution, such
as a bank or broker-dealer, and simultaneously agrees to repurchase the same
or similar security from the institution at a later date at an agreed upon
price. With respect to mortgage-related securities, such transactions are
often called "dollar rolls." In dollar roll transactions, the mortgage-related
securities that are repurchased will bear the same coupon rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories than those sold. During the roll period, the
Fund forgoes principal and interest paid on the securities and is compensated
by the difference between the current sales price and the forward price for
the future purchase as well as by interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash position or a cash equivalent security position
which matures on or before the forward settlement date of the dollar roll
transaction.
Reverse repurchase agreements involve sales by a Fund of portfolio
securities to a financial institution concurrently with an agreement by that
Fund to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Fund continues to receive
principal and interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the Fund with the
proceeds of the initial sale may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement, forward roll or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligations to repurchase the securities. The Staff of the Securities and
Exchange Commission (the "SEC") has taken the position that reverse repurchase
agreements, forward rolls and dollar rolls are to be treated as borrowings for
purposes of the percentage limitations discussed in the section entitled
"Borrowings." The Company expects that under normal conditions most of the
borrowings of the Funds will consist of such investment techniques rather than
bank borrowings. See "Other Investment Practices, Risk Conditions, and
Policies of the Funds--Borrowings" below.
When-Issued and Delayed-Delivery Securities. Each Fund may purchase
securities on a when-issued or delayed-delivery basis. When a Fund purchases
securities in a when-issued or delayed-delivery basis, the price of such
securities is fixed at the time of the commitment, but delivery and payment
for the securities may take place up to 120 days after the date of the
commitment to purchase. With respect to up to 5% of their respective net
assets, the Income Fund and the Balanced Fund may each purchase securities to
be delivered and paid for up to six months after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuation, and
no interest accrues to the purchaser during this period. When-issued and
delayed-delivery securities involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date or increases in
value and there is a failure to deliver the security.
Custodial Receipts. The Income Fund, the Balanced Fund and the Active
Balanced Fund may each acquire custodial receipts or certificates, such as
CATS, TIGRs and FIC Strips, underwritten by securities dealers or banks, that
evidence ownership of future interest payments, principal payments or both on
certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities. The underwriters of these certificates or
receipts generally purchase a U.S. Government security and deposit the
security in an irrevocable trust or custodial account with a custodian bank,
which then issues receipts or certificates that evidence ownership of the
periodic unmatured coupon payments and the final principal payment on the U.S.
Government security. Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero coupon U.S.
Government securities but are not U.S. GovernmentSecurities and therefore are
neither insured nor guaranteed by the U.S. Government.
The Prudential Institutional Fund Prospecuts 15
<PAGE>
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Mortgage-Backed Securities. Mortgage-backed securities represent
interests in pools of mortgages. Principal and interest payments made on the
mortgages in the pools are passed through to the holder of such securities.
Payment of principal and interest on some mortgage-backed securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government, or guaranteed by agencies or
instrumentalities of the U.S. Government. Mortgage-backed securities created
by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers) may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance,
and letters of credit, which may be issued by governmental entities, private
insurers, or the mortgage poolers.
Mortgage-backed securities include CMOs, which are obligations fully
collateralized by the portfolio of mortgaged or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMO as they are received, although certain classes of CMOs have
priority over others for receipt of mortgage pre-payments. Typically, CMOs are
collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities
(such collateral is referred to below as "Underlying Assets").
CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and
special-purpose subsidiaries of the foregoing. The issuer of a series of CMOs
may elect to be treated as a Real Estate Mortgage Investment Conduit
("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of a CMO, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Underlying Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution dates. Interest is paid or accrues on all classes of CMOs
on a monthly, quarterly or semi-annual basis. The principal of and interest on
the Underlying Assets may be allocated among the several classes of a CMO
series in a number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain a more
predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance compared to prevailing market yields on
mortgage-backed securities.
Unscheduled or early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Like other fixed income securities, when interest
rates rise, the value of a mortgage-related security generally will decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other
fixed-income securities.
Asset-Backed Securities. The Balanced Fund, the Active Balanced Fund and
the Income Fund may purchase asset-backed securities that represent either
fractional interests or participations in pools of leases, retail installment
loans, or revolving credit receivables held by a trust or limited purpose
finance subsidiary. Such asset-backed securities may be secured by the
underlying assets (such as Certificates for Automobile Receivables or "CARS")
or may be unsecured (such as Credit Card Receivable Securities ("CARDS")).
Depending on the structure of the asset-backed security, monthly or quarterly
payments of principal and interest or interest only are passed-through or paid
through to certificate holders. Asset-backed securities may be guaranteed up
to certain amounts by guarantees, insurance, or letters of credit issued by a
financial institution affiliated or unaffiliated with the originator of the
pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage
pass-through securities), which may shorten the securities' weighted average
life and reduce their overall return to certificate holders. On the other
hand, asset-backed securities may present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities often do not have
the benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, the security interests in the underlying automobiles are often
not transferred when the pool is created, with the resulting possibility that
the collateral could be resold.
Unlike traditional fixed income securities, interest and principal
payments on asset-backed securities are made more frequently, usually monthly,
and principal may be prepaid at any time. As a result, if a Fund purchases
such a security at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Alternatively, if a Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments
will reduce, yield to maturity. Certificate holders may also experience delays
in payment if the full amounts due on underlying loans, leases, or receivables
are not realized because of unanticipated legal or administrative costs of
enforcing the contracts or because of depreciation or damage to the collateral
(usually automobiles) securing certain contracts, or other factors. If
consistent with its investment objective and policies, the Balanced Fund, the
Active Balanced Fund and the Income Fund may invest in other asset-backed
securities that may be developed in the future.
Types of Credit Enhancement. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations
of a number of different parties. To lessen the effect of failures by obligors
on underlying assets to make payments, those securities may contain elements
of credit support, which fall into two categories: (i) liquidity protection
and (ii) protection against losses resulting from
16 The Prudential Institutional Fund Prospectus
<PAGE>
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Funds will not pay any fees for credit
support, although the existence of credit support may increase the price of a
security.
Liquidity Puts. Each Fund may purchase instruments together with the
right to resell the instruments at an agreed-upon price or yield, within a
specified period prior to the maturity date of the instruments. This
instrument is commonly known as a "liquidity put" or a "tender option bond."
However, the Growth Stock Fund and Stock Index Fund will only use such
instruments in connection with the cash or cash equivalent portion of their
portfolio.
Illiquid Securities. The Funds may invest up to 5% of their net assets in
illiquid securities including repurchase agreements which have a maturity of
longer than seven days, securities with legal or contractual restrictions on
resale (restricted securities) and securities that are not readily marketable
in securities markets either within or outside of the United States.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended (the Securities Act) and privately placed
commercial paper that have a readily available market are not considered
illiquid for purposes of this limitation. The Funds' Advisers will monitor the
liquidity of such restricted securities under the supervision of the Manager
and the Board. Repurchase agreements subject to demand are deemed to have a
maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased OTC options
and the assets used as "cover" for written OTC options are illiquid
securities. However, the Funds may treat the securities they use as "cover"
for written OTC options on U.S. Government securities as liquid provided
they follow a specified procedure. The Funds may sell OTC options on U.S.
Government securities only to qualified dealers who agree that the Fund may
repurchase options it writes for a maximum price to be calculated by a
predetermined formula. In such cases, OTC options would be considered liquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
Securities Lending. Each Fund may lend its portfolio securities to
brokers or dealers, banks, or other recognized institutional borrowers of
securities, provided that the borrower at all times maintains collateral in an
amount equal to at least 100% of the market value of the securities loaned.
During the time Fund securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest any cash collateral it receives and earn additional income, or
it may receive an agreed-upon amount of interest income from the borrower. In
these transactions, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities
fail financially. Each Fund (except the Money Market Fund) may lend up to 30%
of the value of its total assets. The Money Market Fund may lend up to 10% of
the value of its total assets.
Borrowings. Each Fund may borrow from banks or through forward rolls,
dollar rolls or reverse repurchase agreements an amount equal to no more than
20% (except for the Balanced Fund, the Income Fund and the Money Market Fund)
of the value of its total assets to take advantage of investment
opportunities, for temporary, extraordinary, or emergency purposes or for the
clearance of transactions and may pledge up to 20% of the value of its total
assets to secure these borrowings. The Balanced Fund and the Income Fund may
borrow from banks up to 20% of the value of their respective total assets for
the same purposes and may pledge up to 20% of the value of their respective
total assets to secure such borrowings. In addition, the Balanced Fund and the
Income Fund may engage in investment techniques such as reverse repurchase
agreements, forward rolls and dollar rolls to the extent that their respective
assets dedicated to such techniques combined with the respective values of
their bank borrowings do not exceed 33 1/3% of their respective total assets.
Such investment techniques are deemed "borrowings" by the SEC because the SEC
considers these techniques to involve the use of leverage. When a Fund enters
into one of these transactions, it places in a segregated account an amount
equal to the Fund's obligations in that transaction. If a Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings. See Other Investment Practices, Risk Conditions, and
Policies of the Funds--Segregated Accounts. If a Fund borrows to invest in
securities, any investment gains made on the securities in excess of interest
paid on the borrowing will cause the net asset value of the shares to rise
faster than would otherwise be the case. On the other hand, if the investment
performance of the additional securities purchased fails to cover their cost
(including any interest paid on the money borrowed) to the Fund, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. This is the speculative characteristic known as leverage. The Money
Market Fund may borrow an amount equal to no more than 20% of the value of its
total assets only for temporary, extraordinary or emergency purposes.
Securities of Foreign Issuers. The International Stock Fund intends to
invest primarily in securities of foreign issuers. In addition, the other
Funds may invest a portion of their assets in fixed income securities and
equity securities of foreign issuers (denominated in either U.S. or foreign
currency). The Money Market Fund may only invest in U.S. dollar-denominated
securities of foreign issuers.
Foreign securities involve certain unique risks. These risks include
political or economic instability in the country of issue, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. government, its agencies or
instrumentalities. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing, and
financial
The Prudential Institutional Fund Prospectus 17
<PAGE>
reporting standards comparable to those applicable to domestic companies.
Dividends paid by foreign companies may be subject to withholding and other
foreign taxes which may decrease the net return on such investments as
compared to dividends and interest paid by the U.S. Government or by domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation, or diplomatic developments which could
affect investment in those countries. Finally, in the event of a default of
any such foreign fixed income obligations, it may be more difficult for the
Fund to obtain or to enforce a judgment against the issuers of such
securities. If the security is foreign currency denominated, it may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and costs may be incurred in connection with conversions
between currencies.
Investments in emerging and less developed countries involve exposure to
economic structures that are generally less diverse and mature than in the
U.S. or other developed countries. A developing country can be considered to
be a country which is in the initial stages of its industrialization cycle.
Historically, markets of developing countries have been more volatile than the
markets of developed countries.
With respect to equity securities, each Fund (except for the Money Market
Fund) may purchase ADRs. ADRs are U.S. dollar-denominated certificates issued
by a United States bank or trust company and represent the right to receive
securities of a foreign issuer deposited in a domestic bank or foreign branch
of a United States bank and traded on a United States exchange or in an
over-the-counter market. Generally, ADRs are in registered form. There are no
fees imposed on the purchase or sale of ADRs when purchased from the issuing
bank or trust company in the initial underwriting, although the issuing bank
or trust company may impose charges for the collection of dividends and the
conversion of ADRs into the underlying securities. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since: (i) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs are
usually subject to comparable auditing, accounting, and financial reporting
standards as domestic issuers.
Options on Securities and Securities Indices. Each Fund may purchase and
sell put and call options on any securities in which it may invest or options
on any securities index based on securities in which the Fund may invest. Each
Fund is also authorized to enter into closing sale transactions in order to
realize gains or minimize losses on options purchased by the Fund.
A Fund would normally purchase call options to hedge against an increase
in the market value of the type of securities in which the Fund may invest. A
Fund will not engage in such transactions for speculation. The purchase of a
call option would entitle a Fund, in return for the premium paid, to purchase
specified securities at a specified price, upon exercise of the option, during
the option period. A Fund would ordinarily realize a gain if, during the
option period, the value of such securities exceeds the sum of the exercise
price, the premium paid and transaction costs; otherwise, the Fund would
realize a loss on the purchase of the call option.
A Fund would normally purchase put options to hedge against a decline in
the market value of securities in its portfolio ("protective puts"). A Fund
will not engage in such transactions for speculation. The purchase of a put
option would entitle a Fund, in exchange for the premium paid, to sell
specified securities at a specified price, upon exercise of the option, during
the option period. Gains and losses on the purchase of protective puts would
tend to be offset by countervailing changes in the value of underlying Fund
securities. A Fund would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreases below the exercise
price sufficiently to cover the premium and transaction costs; otherwise, the
Fund would realize a loss on the purchase of the put option.
A Fund may purchase and sell put and call options on securities indices
for the same purposes as the purchase and sale of options on securities as
well as for the purpose of hedging against a decline in the value of the
securities owned by the Fund. Securities index options are designed to reflect
price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not
involve the actual purchase or sale of securities. A Fund purchasing
securities index options is subject to the risk that the value of its
portfolio securities may not change as much as the index because a Fund's
investments generally will not match the composition of the index. See Taxes
and Description of Securities, Investment Techniques and Risk Factors of the
Funds in the Statement of Additional Information. No Fund may purchase or sell
options on securities and securities indices if the face amount of all such
contracts held by that Fund will exceed 50% of the total assets of that Fund.
Futures Contracts and Options on Futures Contracts. The Balanced Fund,
the Active Balanced Fund and the Income Fund may enter into futures contracts
on securities, securities indices and interest rate indices. The Stock Index
Fund may enter into futures contracts on securities indices. The International
Stock Fund, the Balanced Fund and the Active Balanced Fund may also enter into
currency futures contracts. Each Fund (except for the Money Market Fund) may
enter into other types of futures contracts when they become available,
provided they correspond to securities held by the relevant Fund.
Each Fund may purchase and sell futures contracts only for hedging and
non-speculative purposes. While there is no limit on the aggregate face amount
of futures contracts that a Fund may purchase or sell, a Fund may not purchase
or sell futures contracts or options on futures, except for closing purchase
or sale transactions or for bonafide hedging purposes, if immediately
thereafter the sum of initial margin deposits on the Fund's outstanding
futures and options positions (net of the amount that positions are "in the
money") and premiums paid for outstanding options on futures would exceed 5%
of the liquidation value of the Fund's total assets. These transactions
involve brokerage costs, require margin deposits and require
18 The Prudential Institutional Fund Prospectus
<PAGE>
the Fund to segregate assets to cover such contracts and options. In addition,
a Fund's activities in futures contracts may be limited by the requirements of
the Internal Revenue Code for qualification as a regulated investment company.
See Taxes and Description of Securities, Investment Techniques and Risk
Factors of the Funds in the Statement of Additional Information.
Foreign Currency Forward Contracts, Options and Futures Transactions. The
International Stock Fund, the Balanced Fund and the Active Balanced Fund may
purchase and sell foreign currency forward contracts, futures contracts on
foreign currency, and options on futures contracts on foreign currency to
protect against the effect of adverse changes on foreign currencies. In
addition to the limitations on such practices described below, the Fund's
ability to engage in such practices may be limited by tax considerations. See
Taxes and Investment Objective and Policies in the Statement of Additional
Information.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, at a price set at the
time of the contract. These contracts are traded in the market conducted
directly between currency traders (typically large commercial banks) and their
customers. See Investment Objective and Policies--Forward Foreign Currency
Exchange Contracts in the Statement of Additional Information.
When a Fund invests in foreign securities, it may enter into forward
contracts in several circumstances to protect the value of its assets. A Fund
may not use forward contracts, options on foreign currencies, futures
contracts on foreign currencies and options on such contracts in order to
generate income, although the use of such contracts may incidentally generate
income. However, a Fund's dealings in forward contracts will be limited to
hedging involving either specific transactions or portfolio positions. When a
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, or when a Fund anticipates the receipt in a foreign
currency of dividends or interest payments on a security which it holds, the
Fund may desire to "lock in" the U.S. dollar price of the security or the U.S.
dollar equivalent of such dividend or interest payment, as the case may be. By
entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transaction, a Fund could protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract, for a fixed amount of dollars, to sell
the amount of foreign currency approximating the value of some or all of the
securities of the Fund denominated in such foreign currency.
A Fund's successful use of foreign currency forward contracts, options on
foreign currencies, futures contracts on foreign currencies and options on
such contracts depends upon the Adviser's ability to predict the direction of
the market and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally.
Risks of Investing in Options and Futures.
Participation in the options or futures markets involves investment risks
and transaction costs to which the Funds would not be subject absent the use
of these strategies. If an Adviser's prediction of movements in the direction
of the securities markets is inaccurate, the adverse consequences to the Fund
may leave the Fund in a worse position than if such strategies were not used.
Risks inherent in the use of options and stock index futures include (i)
dependence on the Adviser's ability to predict correctly movements in the
direction of specific securities being hedged or the movement in the indices;
(ii) imperfect correlation between the price of options and futures and
options thereon and movements in the prices of the assets being hedged; (iii)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (iv) the possible absence of a liquid
secondary market for any particular instrument at any time; and (v) the
possible need to defer closing out certain hedged positions to avoid adverse
tax consequences.
See Taxes and Description of Securities, Investment Techniques and Risk
Factors of the Funds in the Statement of Additional Information.
Interest Rate Swap Transactions. The Balanced Fund and the Income Fund
may enter into interest rate swaps. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest, for example, an exchange of floating rate payments for fixed rate
payments. The Funds expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Funds anticipate purchasing at a later date. The Funds intend to use these
transactions as a hedge and not as a speculative investment. See "Other
Investment Practices, Risk Conditions, and Policies of the Funds--Other
Investment Techniques" in the Statement of Additional Information. The Income
Fund will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. The Balanced Fund may only
enter into interest rate swaps on a net basis. The risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
a Fund is contractually obligated to make. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid high-grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Custodian. To the extent that the Income Fund enters into interest rate swaps
on other than a net basis, the amount maintained in the segregated account
will be the full amount of the Fund's obligations, if any, with respect to
such interest rate swaps, accrued on a daily basis. The total amount deposited
in a Fund's segregated account in respect of interest rate swaps will not
exceed 15% of that Fund's net assets. The Income Fund may
The Prudential Institutional Fund Prospectus 19
<PAGE>
- -------------------------------------------------------------------------------
also, with respect to less than 5% of its respective net assets, purchase and
sell interest rate caps, floors and collars.
The use of interest rate swaps may involve investment techniques and
risks different from those associated with ordinary portfolio transactions. If
a Fund's Adviser is incorrect in its forecast of market values, interest rates
and other applicable factors, the investment performance of the Fund would
diminish compared to what it would have been if this investment technique had
not been used.
When a Fund enters into interest rate swaps on other than a net basis,
the entire amount of the Fund's obligations, if any, with respect to such
interest rate swaps will be treated as illiquid. To the extent that a Fund
enters into interest rate swaps on a net basis, the net amount of the excess,
if any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be treated as illiquid.
- -------------------------------------------------------------------------------
More Facts About the Company
Organization and Capitalization. The Company was established as a
Delaware business trust on May 11, 1992. The Board of Trustees is responsible
for the overall management and supervision of its affairs. The Company is
authorized to issue unlimited shares of beneficial interest, $0.001 par value
per share. Each share issued with respect to a Fund has a pro-rata interest in
the assets of that Fund and has no interest in the assets of any other Fund.
Each Fund bears its own liabilities and its proportionate share of the general
liabilities of the Company and is not responsible for the liabilities of any
other Fund. The Board is empowered by the Company's Declaration of Trust and
By-laws to establish additional series and classes of shares. As of December
31, 1993, each of the following entities owned more than 25% of the
outstanding voting securities of each of the portfolios indicated: Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund
Prudential Employees Savings Plan, Prudential Insurance Company of America
Variable Contract OA; Active Balanced Fund Jennison Associates, Prudential
Insurance Company of America, Prudential Insurance Company of America Variable
Contract OA; Income Fund and Money Market Fund Prudential Insurance Company of
America.
Portfolio Turnover. Although no Fund purchases securities with a view to
rapid turnover, there are no limitations on the length of time that securities
must be held by any Fund and a Fund's annual portfolio turnover rate may vary
significantly from year to year. It is estimated that, under normal
circumstances, the annual turnover rates for each Fund will be no greater
than: 100% for the Growth Stock Fund; 100% for the Stock Index Fund; 100% for
the International Stock Fund; 200% for the senior fixed income portion of the
Balanced Fund; 100% for the common stock portion of the Balanced Fund; 100%
for the fixed income portion of the Active Balanced Fund; 100% for the common
stock portion of the Active Balanced Fund; and 200% for the Income Fund. A
portfolio turnover rate in excess of 100% may exceed that of other investment
companies with similar objectives. A higher portfolio turnover rate may
involve correspondingly greater transaction costs, which would be borne
directly by the Funds, as well as additional realized gains and/or losses to
shareholders.
Expenses. The Company bears all expenses of its operation, other than
those assumed by the Manager. In addition, the expense of organizing the
Company and registering and qualifying its initial shares under federal and
state securities laws will be charged to the Company's operations, as an
expense, over a period not to exceed five years.
In the interest of limiting the expenses of the Funds, the Manager has
agreed, for the period ending September 30, 1996, to bear any
expenses which would cause the ratio of expenses payable by each Fund ("Fund
Operating Expenses") to average daily net assets to exceed the estimated Total
Operating Expenses for each Fund specified in the expense table at the
beginning of the Prospectus. Expenses paid or assumed under this agreement are
subject to recoupment by the Manager from the relevant Fund provided that (a)
no recoupment will be made, in any year, if it would result in the Fund's
expense ratio exceeding the estimated Total Operating Expenses (After
Reduction) for that Fund set forth in the expense table and (b) no recoupment
will be made after December 31, 1996. Organizational expenses will be charged
to each Fund over a period not to exceed 60 months. The Management Agreement
between the Company and the Manager provides that one or more additional
expense limitation periods (of the same or different levels and time periods)
may be implemented after the expiration of the current one on December 31,
1996, and that with respect to any such additional limitation period, the
Manager may recoup such expenses from a Fund, provided the recoupment does not
result in the Fund's aggregate expenses exceeding the additional expense
limitation.
Meetings and Voting Rights. The Company does not intend to hold annual
shareholder meetings. Shareholders have certain rights, as set forth in the
Agreement and Declaration of Trust, including the right to call a meeting of
shareholders for the purpose of voting on the removal of one or more Trustees.
Such removal may be effected upon the action of two-thirds of the outstanding
shares of the Company.
Shareholders are entitled to one vote per share. Shares of a Fund will be
voted only with respect to that Fund except for the election of Trustees and
ratification of independent accountants. Approval by the shareholders of one
Fund is effective as to that Fund. Shares have noncumulative voting rights, do
not have preemptive or subscription rights, and are transferable. Pursuant to
the 1940 Act, shareholders of each Fund are required to approve the adoption
of any investment advisory agreement relating to such Fund and of any changes
in fundamental investment restrictions or policies of the Fund.
Certificates. In the interest of economy and efficiency, the Company does
not issue stock certificates. Shareholders of uncertificated shares have the
same ownership rights as if certificates had been issued.
Shareholder Communications. Shareholders of the Company will receive
annual financial statements examined by the Company's independent accountants
as well as unaudited semi-annual financial state-
20 The Prudential Institutional Fund Prospectus
<PAGE>
ments. Each report will show the investments owned by the Company and their
respective market values thereof, and will provide other financial
information. Shareholders with inquiries regarding the Company and individual
accounts should contact the Manager at (800) 824-7513.
Custodian. The Company's Custodian is State Street Bank and Trust
Company, P.O. Box 1713, Boston, Massachusetts 02005.
Additional Information. This Prospectus, including the Statement of
Additional Information which has been incorporated by reference herein, does
not contain all the information set forth in the Registration Statement filed
by the Company with the SEC under the Securities Act of 1933. Copies of the
Registration Statement may be obtained from the Commission or may be examined
at the office of the Commission in Washington, D.C.
The Prudential Institutional Fund Prospectus 21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 19, 1994
AS SUPPLEMENTED ON OCTOBER 4, 1994
THE PRUDENTIAL INSTITUTIONAL FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
This Statement of Additional Information supplements the information
contained in the current Prospectus (the "Prospectus") of The Prudential
Institutional Fund (the "Company"), dated January 19, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Prospectus. The Prospectus may be obtained by contacting your Program
Administrator or by writing the Company at the address listed above. This
Statement of Additional Information, although not in itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the section headings used in this Statement of
Additional Information, where applicable, are identical to those used in the
Prospectus. Capitalized terms used but not defined in this Statement of
Additional Information have the meanings accorded to them in the Prospectus.
Page
THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
Stock Index Fund. . . . . . . . . . . . . . . . . . . . . . B-3
Money Market Fund . . . . . . . . . . . . . . . . . . . . . B-4
MANAGEMENT OF THE COMPANY. . . . . . . . . . . . . . . . . . . . B-5
The Manager and Advisers. . . . . . . . . . . . . . . . . . B-5
The Administrator . . . . . . . . . . . . . . . . . . . . . B-8
The Distributor . . . . . . . . . . . . . . . . . . . . . . B-9
Counsel and Auditors. . . . . . . . . . . . . . . . . . . . B-9
THE TRUSTEES and OFFICERS. . . . . . . . . . . . . . . . . . . . B-9
OTHER CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . B-14
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . B-14
Portfolio Transactions. . . . . . . . . . . . . . . . . . . B-17
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19
<PAGE>
PERFORMANCE AND YIELD INFORMATION. . . . . . . . . . . . . . . . B-22
Calculation of Money Market Fund Yield. . . . . . . . . . . B-22
Calculation of Fund Performance (except Money Market Fund). B-22
Yield. . . . . . . . . . . . . . . . . . . . . . . . . . B-22
Average Annual Total Return. . . . . . . . . . . . . . . B-23
Aggregate Total Return . . . . . . . . . . . . . . . . . B-24
OTHER INVESTMENT PRACTICES, RISK CONDITIONS, AND
POLICIES OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . B-25
U.S. Government Securities. . . . . . . . . . . . . . . . . B-25
Repurchase Agreements and Reverse Repurchase Agreements . . B-25
Debt Securities . . . . . . . . . . . . . . . . . . . . . . B-26
When-Issued and Delayed Delivery Securities . . . . . . . . B-27
Forward Rolls and Dollar Rolls. . . . . . . . . . . . . . . B-28
Mortgage-Related Securities . . . . . . . . . . . . . . . . B-28
Collateralized Mortgage Obligations . . . . . . . . . . . . B-30
Asset-Backed Securities . . . . . . . . . . . . . . . . . . B-30
Custodial Receipts. . . . . . . . . . . . . . . . . . . . . B-30
Securities Lending. . . . . . . . . . . . . . . . . . . . . B-31
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . B-31
Securities of Foreign Issuers . . . . . . . . . . . . . . . B-32
Liquidity Puts. . . . . . . . . . . . . . . . . . . . . . . B-32
Options on Securities and Securities Indices. . . . . . . . B-33
Futures Contracts and Options On Futures Contracts. . . . . B-34
Foreign Currency Forward Contracts, Options and Futures
Transactions. . . . . . . . . . . . . . . . . . . . . . . B-36
Illiquid Securities . . . . . . . . . . . . . . . . . . . . B-37
Other Investment Techniques . . . . . . . . . . . . . . . . B-39
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . B-39
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT. . . . . . . . B-44
APPENDIX - DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . B-44
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . B-48
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . B-81
B-2
<PAGE>
THE FUNDS
The Prospectus discusses the investment objectives of the following Funds
and the policies to be employed to achieve those objectives.
* Growth Stock Fund
* Stock Index Fund
* International Stock Fund
* Active Balanced Fund
* Balanced Fund
* Income Fund
* Money Market Fund
Supplemental information is set out below concerning the types of securities
and other instruments in which the Funds may invest, the investment policies
and strategies that the Funds may utilize and certain risks attendant to those
investments, policies and strategies.
Stock Index Fund
If net cash outflows from the Stock Index Fund are anticipated, the Stock
Index Fund may sell stocks (in proportion to their weighing in the S&P 500
Index) in amounts in excess of those needed to satisfy the cash outflows and
hold the balance of the proceeds in short-term investments if such a
transaction appears, taking into account transaction costs, to be more
efficient than selling only the amount of stocks needed to meet the cash
requirements. The Stock Index Fund will not increase its holdings of cash in
anticipation of any decline in the value of the S&P 500 Index or of the stock
markets generally. If the Stock Index Fund does hold un-hedged short-term
investments as a result of the patterns of cash flows to and from the Fund,
such holdings may cause its performance to differ from that of the S&P 500
Index.
THE "FUND" IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STANDARD &
POOR'S ("S&P"). S&P MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
TO THE SHAREHOLDERS OF THE FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE
ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE FUND PARTICULARLY
OR THE ABILITY OF THE S&P 500 INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE.
S&P'S ONLY RELATIONSHIP TO THE MANAGER AND ITS AFFILIATES IS THE LICENSING OF
CERTAIN TRADEMARKS AND TRADE NAMES OF S&P AND OF THE S&P 500 INDEX WHICH IS
DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO THE MANAGER OR
THE FUND. S&P HAS NO OBLIGATION TO TAKE THE NEEDS OF THE MANAGER OR THE
SHAREHOLDERS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE
S&P 500 INDEX. S&P IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE
ISSUANCE OR SALE OF THE SHARES OF THE FUND. S&P HAS NO OBLIGATION OR LIABILITY
IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE FUND.
B-3
<PAGE>
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED. AS TO THE RESULTS TO BE OBTAINED BY MANAGER, SHAREHOLDERS, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR
ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Money Market Fund
The Money Market Fund may also, consistent with the provisions of Rule
2a-7 of the Investment Company Act of 1940, as amended (the "1940 Act"),
invest in securities with a face maturity of more than 397 days, provided that
either the security is a variable or floating rate U.S. government security,
or it is a floating or variable rate security with certain demand or interest
rate reset features.
The Money Market Fund uses the amortized cost method of valuing its
investments, which facilitates the maintenance of the Fund's per share net
asset value at $1.00. The amortized cost method, which is used to value all of
the Fund's securities, involves initially valuing a security at its cost and
thereafter amortizing to maturity any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
The extent of deviation between the Money Market Fund's net asset value
based upon available market quotations or market equivalents and $1.00 per
share based on amortized cost will be periodically examined by the Trustees.
If such deviation exceeds 1/2 of 1%, the Trustees will promptly consider what
action, if any, will be initiated. In the event the Trustees determine that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, they will cause the Money Market Fund
to take such corrective action as they regard to be necessary and appropriate
to eliminate or reduce to the extent reasonably practicable such dilution or
unfair results. Such action may include the sale of Money Market Fund
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations
or equivalents. In addition, in order to stabilize the net asset value per
share at $1.00, the Trustees have the authority (i) to reduce or increase the
number of shares outstanding on a pro rata basis, and (ii) to offset each
shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends.
B-4
<PAGE>
MANAGEMENT OF THE COMPANY
The Manager and Advisers
The Manager of the Company is Prudential Institutional Fund Management,
Inc., whose principal business address is 30 Scranton Office Park, Moosic,
Pennsylvania 18507-1789.
Pursuant to the Management Agreement with the Company, the Manager,
subject to the supervision of the Company's Trustees and in conformity with
the stated policies of the Company, manages both the investment operations of
the Company and the composition of the Company's Funds, including the
purchase, retention, disposition and loan of securities, and other instruments
held by the Funds. In connection therewith, the Manager is obligated to keep
certain books and records of the Company. The management services of the
Manager for the Company are not exclusive under the terms of the Management
Agreement and the Manager is free to, and does, render management services to
others. The directors of the Manager are Robert E. Riley and Mark R. Fetting.
Mr. Fetting is the President, Walter E. Watkins, Jr. is the Vice President,
Mary L. Cavanaugh is the Secretary and Martin Pfinsgraff is the Treasurer of
the Manager.
The Manager has agreed, until October 30, 1994, to bear any expenses,
including management fees, which would cause the ratio of expenses payable by
each Fund to average daily net assets to exceed the estimated Total Operating
Expenses (After Reduction) for each Fund specified in the expense table at the
beginning of the Prospectus. The fees are computed daily and payable monthly.
The Management Agreement also provides that, in the event the expenses of the
Company (including the fees of the Manager, but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course
of the Company's business) for any fiscal year exceed the lowest applicable
annual expense limitation established and enforced pursuant to the statutes or
regulations of any jurisdiction in which the Company's shares are qualified
for offer and sale, the compensation due to the Manager will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable
to the Manager will be paid by the Manager to the relevant Fund. Currently,
the Company believes that the most restrictive expense limitation of state
securities commissions is 2-1/2% of the Company's average daily net assets up
to $30 million, 2% of the next $ 70 million of such assets and 1-1/2% of such
assets in excess of $100 million. The Company reserves the right to waive any
and all fees or a portion thereof at its discretion. Such waiver is subject to
later reimbursement by the applicable Fund.
In connection with its management of the business affairs of the Company,
the Manager bears the following expenses:
(i) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Funds' Advisers;
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<PAGE>
(ii) all expenses incurred by the Manager or by the Company in connection
with managing the ordinary course of the Company's business, other than those
assumed by the Company as described below; and
(iii) the costs and expenses payable to The Prudential Investment
Corporation ("PIC"), Jennison Associates Capital Corp. ("Jennison") and
Mercator Asset Management, Inc. ("Mercator") (collectively, the "Advisers")
pursuant to the subadvisory agreements between the Manager and the Advisers
(collectively, the "Advisory Agreements").
Under the terms of the Management Agreement, the Company is responsible
for the payment of the following expenses: (i) the fees payable to the
Manager, (ii) the fees and expenses of Trustees who are not affiliated persons
of the Manager or the Funds' Advisers, (iii) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager and Plan Administrator in connection with
its obligation of maintaining required records of the Company, pricing the
Funds' shares and the cashiering function, (iv) the charges and expenses of
legal counsel and independent accountants for the Company, (v) brokerage
commissions and any issue expenses or transfer taxes chargeable to the Company
in connection with its securities and futures transactions, (vi) all taxes and
corporate fees payable by the Company to governmental agencies, (vii) the fees
and any trade associations of which the Company may be a member, (viii) the
cost of stock certificates representing shares of Funds of the Company, if
any, (ix) the cost of fidelity and liability insurance, (x) the fees and
expenses involved in registering and maintaining registration of the Company
and of its shares with the SEC, registering the Company as a broker or dealer
and qualifying its shares under state securities laws, including the
preparation and printing of the Company's registration statements and
prospectuses for such purposes, (xi) licensing fees, if any, (xii) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (xiii) fees of the
Administrator, and (xiv) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Company's
business.
The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Company in connection
with the matters to which the Management Agreement relates, except a loss
resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. The Management Agreement provides that it will terminate
automatically in the event of its assignment (as defined in the 1940 Act), and
that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the 1940 Act. The Management Agreement was
approved by the Trustees of the Company, including all of the Trustees who are
not parties
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<PAGE>
to the contract or interested persons of any such party as defined in the 1940
Act on November 19, 1993 and by the sole shareholder of the Company on October
12, 1992. For the period from commencement of each Fund's operations through
September 30, 1993, the Manager received, before any reduction due to the
subsidy by the Manager of certain expenses of the Fund, the following
management fees from each Fund, expressed both as a dollar amount and as a
percentage of each Fund's average daily net assets: Growth Stock, $111,337
(.70%);Stock Index, $68,014 (.40%); International Stock, $150,665 (1.15%);
Active Balanced, $66,355 (.70%); Balanced, $110,128 (.70%); Income, $75,122
(.50%); and Money Market, $84,206 (.45%). During the same period the Manager
subsidized certain expenses of the Fund. See "Fund Expenses" and "Management
of the Company -- Manager" in the Prospectus.
The Manager has entered into Advisory Agreements with PIC, Jennison and
Mercator. The Advisory Agreements provide that the Advisers furnish investment
advisory services in connection with the management of their respective Funds.
For their services as Fund Advisers, Jennison and Mercator are each paid a
portion of the fee the Manager receives from each Fund. PIC is reimbursed by
the Manager for the reasonable costs and expenses incurred in furnishing its
services. In connection therewith, the Advisers are obligated to keep certain
books and records of the respective Funds to which they provide advisory
services. The Manager continues to have responsibility for all investment
advisory services to all the Funds pursuant to the Management Agreement and
supervises the Advisers' performance of such services.
Jennison Associates Capital Corp. advises the Growth Stock Fund and
Active Balanced Fund. Founded in 1969 and acquired by The Prudential in 1985,
Jennison is known for its highly skilled investment team that has worked
together for many years. Dedicated to achieving superior investment results
for institutional investors, Jennison currently has over $23 billion in assets
under management, including $10 billion in investments managed with a "growth
stock" and $1 billion in actively managed balanced assets.
Mercator Asset Management advises the International Stock Fund. Dedicated
to global and international common stock investing, Mercator (a wholly owned
subsidiary of Prudential) was organized in 1984 by senior professionals
formerly associated with Templeton Investment Counsel. Mercator currently
manages close to $2 billion for institutional clients.
Prudential Investment Corporation (PIC) advises the Stock Index,
Balanced, Income and Money Market Funds through various of its specialized
investment units.
Prudential Diversified Investment Strategies (PDI) manages the Stock
Index Fund and Balanced Fund. PDI is dedicated to equity index and balanced
fund investing for institutional clients. Founded in 1975, PDI is among the
oldest qualitatively-oriented balanced managers in the country. PDI currently
manages close to $13 billion in balanced and indexed assets.
B-7
<PAGE>
Prudential Fixed Income Advisors (PFIA) manages the Income Fund. PFIA
focuses on fixed income investing. Organized in 1984, PFIA is a recognized
leader in asset/liability management and other structured bond portfolios.
PFIA currently manages over $17 billion in fixed income assets.
Prudential Liquidity Asset Management (Pru LIQUIDITY) manages the Money
Market Fund. Pru LIQUIDITY specializes in short-term fixed income portfolio
management and is a recognized leader in this type of investment management.
Organized in 1985, Pru LIQUIDITY currently manages over $21 billion in assets.
The Advisory Agreements were approved by the Trustees, including a
majority of the Trustees who are not interested persons of the Company and who
have no direct or indirect financial interest in the Advisory Agreements, on
November 19, 1993, and by the sole shareholder of the Company on October 12,
1992.
Each Advisory Agreement provides that it will terminate in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement. Each Advisory Agreement may be terminated by the
Company, the Manager or the relevant Adviser upon not more than 60 days', nor
less than 30 days', written notice. Each Advisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the 1940 Act.
The Administrator
The Company has entered into an Administration Agreement with Prudential
Mutual Fund Management, Inc. ("PMF"), an affiliate of the Manager, which
provides that PMF will administer the Company's business affairs and, in
connection therewith, furnish the Company with office facilities, together
with those ordinary clerical and bookkeeping services which are not being
furnished by State Street Bank and Trust Company, the Company's Custodian. PMF
will also act as the Company's Transfer and Dividend Disbursing Agent through
its wholly-owned subsidiary, Prudential Mutual Fund Services, Inc. Under the
Administration Agreement, the Company will pay PMF a monthly fee at an annual
rate of .17% of the Company's average daily net assets up to $250 million and
.15% of the Company's average daily net assets in excess of $250 million. PMF
will also provide the Company with transfer agent and dividend disbursing
services for no additional fee through its wholly-owed subsidiary, Prudential
Mutual Fund Services, Inc. ("PMFS"), P.O. Box 15005, New Brunswick, New Jersey
08906. PMF will reimburse PMFS for certain of the out-of-pocket expenses PMFS
may incur in providing these services and the Company will reimburse PMF for
these out-of-pocket expenses. For the period from November 5, 1992
(commencement of operations) to September 30, 1993 the Administrator received
$178,445 under the Administration Agreement.
B-8
<PAGE>
The Distributor
Prudential Retirement Services, Inc. ("PRSI") serves as the Distributor
of the Company's shares. The Company's distribution agreement with PRSI (the
"Distribution Agreement") has been approved by the Trustees, including a
majority of the Trustees who are not interested persons of the Company and who
have no direct or indirect financial interest in the Distribution Agreement,
on November 19, 1993. Potential investors may be introduced to the Distributor
and persons who introduce investors may be compensated for such introductions.
Counsel and Auditors
Kirkpatrick & Lockwood serves as counsel to the Company.
Deloitte & Touche, independent accountants, serve as auditors of the
Company.
THE TRUSTEES AND OFFICERS
Principal Occupations
Name and Position During Past Five
Address with Company Years
- -------- ------------ ---------------------
William P. Link* Chairman of Executive Vice President,
56 N. Livingston Avenue the Board The Prudential Insurance
Roseland NJ 07068 of Trustees Company of America (November
1990 to present); Chairman and
Executive Officer, Group
Operations (October, 1993 to
present); Chairman and Chief
Executive Officer, Prudential
Reinsurance Company (May, 1994
to present); previously
President, Group Operations
(March, 1989 to October, 1993).
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with the Manager, the Distributor or a Subadviser.
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<PAGE>
Principal Occupations
Name and Position During Past Five
Address with Company Years
- -------- ------------ ---------------------
Mark R. Fetting* President President & Chief
30 Scranton Office Park and Operating Officer,
Moosic, PA 18507-1789 Trustee Prudential Institutional
Fund Management, Inc. (May,
1992 to date); Managing
Director, The Prudential
Investment Corporation
(October, 1991 to date);
President of Prudential Defined
Contribution Services (April
1992 to date); Investment
Management Consultant, (1989 to
1991); Partner, Greenwich
Associates (1988 to 1989);
President, Review Management
Corp. (1987); Vice President,
T. Rowe Price Associates, Inc.
(1983 to 1987).
James W. Stevens* Trustee Chairman and Chief Executive
100 Mulberry Street Officer of Prudential Asset
Gateway III Management Group (August, 1993
Newark, NJ 07102 to date); Executive Vice
President of The Prudential
Investment Corporation
(October, 1987 to present).
David A. Finley Trustee Consultant (January 1990
17 Bedford Center Road to date); Treasurer, IBM
Bedford Hills, NY 10507 Corp. (1986 to 1989).
William E. Fruhan, Jr. Trustee Professor, Harvard
Harvard Business School Graduate School of
Boston, MA 02163 Business Administration (1979
to date).
August G. Olsen Trustee Pensions and Investments
417 W. Hawthorne Ct. Consultant, August G.
Lake Bluff, IL 60044 Olsen, Consulting (1992 to
date); Corporate Pension Fund
Officer and Investment Manager,
Abbott Laboratories (1987 to
1992).
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with the Manager, the Distributor or a Subadviser.
B-10
<PAGE>
Principal Occupations
Name and Position During Past Five
Address with Company Years
- -------- ------------ ---------------------
Herbert G. Stolzer Trustee Executive Committee
19 Yorktown Road Member, Board of Directors;
East Brunswick, NJ 08816 Member and Assistant to the
Chairman of the Board of
Directors, Johnson & Johnson
(August 1987 to January 1991).
Thomas A. Early Vice President Vice President and Secretary of
Prudential Institutional Fund
Management and Prudential
Retirement Services, Inc.
(since April 1994); Vice
President and General Counsel,
Prudential Defined Contribution
Services, Inc. (since April
1994); Formerly Associate
General Counsel and Chief
Financial Services Counsel for
Frank Russell & Company (April
1988 - April 1994).
Robert F. Gunia Vice President Chief Administrative
One Seaport Plaza Officer (since July 1990),
New York, New York Director (since January 1989),
Executive Vice President,
Treasurer and Chief Financial
Officer (since June 1987) of
Prudential Mutual Fund
Management, Inc., Senior Vice
President (since March 1987) of
Prudential Securities
Incorporated; Vice President
and Director of The Asia
Pacific Fund, Inc. (since May
1989) and Director of Nicholas
Applegate Fund, Inc. (since
February 1992).
Walter E. Watkins, Jr. Vice President Vice President, Prudential
Institutional Fund Management
and Director of Mutual Fund
Administration, Prudential
Defined Contribution Services,
Inc. (since April 1993) and
Vice President of Prudential
Retirement Services, Inc.
(since March 1994). Formerly,
financial reporting consultant
(August 1991 - September 1992);
B-11
<PAGE>
formerly Controller, CIGNA
Mutual Funds (1987 - 1991).
Principal Occupations
Name and Position During Past Five
Address with Company Years
- -------- ------------ ---------------------
Susan C. Cote Treasurer Senior Vice President
One Seaport Plaza (since January 1989) and
New York, New York First Vice President (July 1987
to December 1988) of Prudential
Mutual Fund Management, Inc.,
Senior Vice President (since
January 1992) and Vice
President (January 1986 to
December 1991) of Prudential
Securities Incorporated.
S. Jane Rose Secretary Senior Vice President
One Seaport Plaza (since January 1991),
New York, New York Senior Counsel (since June
1987) and First Vice President
(June 1987 - December 1990) of
Prudential Mutual Fund
Management, Inc.; Senior Vice
President and Senior Counsel of
Prudential Securities
Incorporated (since July 1992);
formerly Vice President and
Associate General Counsel of
Prudential Securities
Incorporated.
Domenick Pugliese Assistant Vice President
One Seaport Plaza Secretary (since June 1992) and
New York, New York Associate General Counsel
(since March 1992) of
Prudential Mutual Fund
Management, Inc.;
Vice President and
Associate General Counsel of
Prudential Securities
Incorporated (since July 1992);
prior thereto, Associate with
the law firm of Battle Fowler.
As of December 31, 1993, the Trustees and officers of the Fund, as a
group owned beneficially less than 1% of the stock of the Company. As of
December 31, 1993, each of the following entities owned more than 5% of the
outstanding voting securities of each of the portfolios indicated:
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<PAGE>
Portfolio Shares
- --------- ------
Growth Stock Fund Prudential Employee Savings Plan 1,623,952 (36.7%)
71 Hanover Road
Florham Park, NJ 07932-1502
Prudential Insurance Company 943,005 (21.3%)
of America Variable Contract
Account OA
C/O PAMCO Comptrollers
71 Hanover Road
Florham Park, NJ 07932-1502
Stock Index Fund Prudential Employee Savings Plan 1,027,918 (37.2%)
71 Hanover Road
Florham Park, NJ 07932-1502
Prudential Insurance Company 1,494,291 (54.1%)
of America Variable Contract
Account OA
C/O PAMCO Comptrollers
71 Hanover Road
Florham Park, NJ 07932-1502
International Stock Prudential Employee Savings Plan 1,973,672 (57.4%)
Fund 71 Hanover Road
Florham Park, NJ 07932-1502
Prudential Insurance Company 1,183,241 (34.4%)
of America Variable Contract
Account OA
C/O PAMCO Comptrollers
71 Hanover Road
Florham Park, NJ 07932-1502
Balanced Fund Prudential Employee Savings Plan 865,856 (31.2%)
71 Hanover Road
Florham Park, NJ 07932-1502
Prudential Insurance Company 1,692,844 (61.1%)
of America Variable Contract
Account OA
C/O PAMCO Comptrollers
71 Hanover Road
Florham Park, NJ 07932-1502
Active Balanced Jennison Associates 506,249 (13.7%)
Fund Capital Corp. Savings Plan
466 Lexington Avenue
New York, NY 10017-3151
B-13
<PAGE>
Portfolio Shares
- --------- ------
Prudential Insurance Company 409,091 (11.1%)
of America
C/O Prudential Defined
Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1796
Prudential Insurance Company 1,462,387 (39.7%)
of America Variable Contract
Account OA
C/O PAMCO Comptrollers
71 Hanover Road
Florham Park, NJ 07932-1502
Income Fund Prudential Insurance Company 2,612,686 (75.6%)
of America
C/O Prudential Defined
Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
Money Market Fund Prudential Insurance Company 25,698,850 (85.2%)
of America
c/o Prudential Defined
Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
The Prudential Insurance Company of America is a mutual life insurance
company incorporated in 1873 under the laws of the state of New Jersey. The
Prudential Employee Savings Plan is a defined contribution retirement plan.
The PAMCO VCA OA Account is a portion of The Prudential Variable Contract
Investment Fund, a separate account, established in 1962, of The Prudential
Insurance Company of America. Jennison Associates Capital Corp. Savings Plan
is a defined contribution retirement plan.
The interested trustees serve without compensation. Trustees who are
unaffiliated with the Manager, the Distributor or any Subadviser are
compensated for their reasonable expenses and each receives annual
compensation of $15,000.
OTHER CONSIDERATIONS
Net Asset Value
Portfolio securities of each Fund, except the Money Market Fund, are
generally valued as follows: (1) Securities for which the primary market is on
an exchange are valued at the last sale price on such exchange on the day of
valuation or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day; (2) Securities that are
actively traded in the over-the-counter market, including listed securities
for which the primary market is believed to be
B-14
<PAGE>
over-the-counter, are valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker; (3) Securities issued
in private placements are valued at the mean between the bid and asked prices
provided by primary market dealers or, if no primary dealers are able to
provide a market value, at fair value determined by a valuation committee of
Trustees (the "Valuation Committee"); (4) U.S. Government securities for which
market quotations are available are valued at a price provided by an
independent broker/dealer or pricing service; (5) Short-term debt securities,
including bonds, notes, debentures and other debt securities, and money market
instruments such as certificates of deposit, commercial paper, bankers'
acceptances and obligations of domestic and foreign banks, with remaining
maturities of 60 days or more, for which reliable market quotations are
readily available, are valued at current market quotations as provided by an
independent broker/dealer or pricing service; (6) Short-term investments with
remaining maturities of 60 days or less are valued at cost with interest
accrued or discount amortized to the date of maturity, unless the Trustees
determine that such valuation does not represent fair value; (7) Options on
securities that are listed on an exchange are valued at the last sales price
at the close of trading on such exchange or, if there was no sale on the
applicable options exchange on such day, at the average of the quoted bid and
asked prices as of the close of such exchange; (8) Futures contracts and
options thereon traded on a commodities exchange or board of trade are valued
at the last sale price at the close of trading on such exchange or board of
trade or, if there was no sale on the applicable commodities exchange or board
of trade on such day, at the average of quoted bid and asked prices as of the
close of such exchange or board of trade; (9) Quotations of foreign securities
in a foreign currency shall be converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer; (10) Forward currency
exchange contracts are valued at the current cost of covering or offsetting
such contracts; (11) Over-the-counter (OTC) options are valued at the mean
between bid and asked prices provided by a dealer, with additional prices
obtained for comparison, monthly and as indicated by monitoring of the
underlying securities; (12) Securities for which market quotations are not
available, other than private placements, are valued at a price supplied by a
pricing agent approved by the Trustees; (13) Securities for which reliable
market quotations are not available or for which the pricing agent or
principal market maker does not provide a valuation or provides a valuation
that, in the judgment of the Subadviser, does not represent fair value, are
valued by the Valuation Committee on the basis of cost of the security,
transactions in comparable securities, relationships among various securities
and other factors determined by the Subadviser to materially affect the value
of the security. The Company may engage pricing services to obtain any prices.
The Trustees have determined that in the best interests of shareholders
the best method currently available for valuing the Money Market Fund's
securities is amortized cost. The Trustees continuously review this method of
valuation to assure that the Portfolio's securities are valued at their fair
value, as determined by the Trustees in good faith. The Trustees are
obligated, as a particular responsibility within the overall duty of care owed
to shareholders, to establish procedures reasonably designed, taking into
account current market conditions and the Money Market Fund's investment
objective, to stabilize the net asset value
B-15
<PAGE>
per share as computed for the purpose of distribution and redemption at $1.00
per share. The Trustees' procedures include periodically monitoring, as
appropriate and at such intervals as are reasonable in light of current market
conditions, the relationship between the amortized cost value per share and a
net asset value per share based upon available indications of market value.
While the amortized cost method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Fund would receive if it sold
the instrument. During periods of declining interest rates, the quoted yield
on shares of the Money Market Fund may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of
its portfolio instruments. Thus, if the use of amortized cost by the Money
Market Fund resulted in a lower aggregate portfolio value on a particular day,
a prospective investor in the Money Market Fund would be able to obtain a
somewhat higher yield if he or she purchased shares of the Money Market Fund
on that day, than would result from investment in a fund utilizing solely
market values, and existing investors in the Money Market Fund would receive
less investment income. The converse would apply in a period of rising
interest rates.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on
the business day as of which such value is being determined at the close of
the exchange representing the principal market for such securities. The value
of all assets and liabilities expressed in foreign currencies will be
converted into U.S. dollar values at the current rate obtained from a
recognized bank or dealer. If such quotations are not available, the rate of
exchange will be determined in good faith by or under procedures established
by the Trustees of the Company.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the NYSE is
open for trading). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which the Funds' net asset values are not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the
regular trading on the NYSE will not be reflected in the Fund's calculation of
net asset values unless, pursuant to procedures adopted by the Trustees, the
Adviser deems that the particular event would materially affect net asset
value, in which case an adjustment will be made.
B-16
<PAGE>
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically
allocated to such Fund and constitute the underlying assets of that Fund. The
underlying assets of each Fund will be segregated on the books of account, and
will be charged with the liabilities in respect to such Fund and with a share
of the general liabilities of the Company. Expenses with respect to any two or
more Funds are to be allocated in proportion to the net asset values of the
respective Funds except where allocations of direct expenses can otherwise be
fairly made.
Portfolio Transactions
Decisions to buy and sell assets for a Fund are made by the Fund's
Adviser, subject to the overall review of the Manager and the Trustees of the
Company. Although investment decisions for the Funds are made independently
from those of the other accounts managed by an Adviser, investments of the
type that the Funds may make also may be made for those other accounts. When a
Fund and one or more other accounts managed by an Adviser are prepared to
invest in, or desire to dispose of, the same security, available investments
or opportunities for sales will be allocated in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by a Fund or the size of the position
obtained or disposed of by a Fund.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S.
over-the-counter markets, but the prices of those securities includes
commissions or mark-ups. The cost of securities purchased from underwriters
includes an underwriting commission or concession and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up
or mark-down. U.S. Government securities generally are purchased from
underwriters or dealers, although certain newly-issued U.S. Government
securities may be purchased directly from the U.S. Treasury or from the
issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on
behalf of a Fund, its Adviser seeks the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
will consider the factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, each Advisory Agreement between the Manager and the Adviser
authorizes the Adviser, in selecting brokers or dealers to execute a
particular transaction, and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund
and/or other accounts over which the Adviser
B-17
<PAGE>
or its affiliates exercise investment discretion. The fees under the
Management Agreement and the Advisory Agreements, respectively, are not
reduced by reason of a Fund's Adviser receiving brokerage and research
services. The Trustees of the Company will periodically review the commissions
paid by a Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits inuring to the
Fund. Over-the-counter purchases and sales by a Fund are transacted directly
with principal market makers except in those cases in which better prices and
executions may be obtained elsewhere.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC under the 1940 Act, the Trustees
have determined that transactions for a Fund may be executed through
Prudential Securities Incorporated ("PSI") and other affiliated broker-dealers
if, in the judgment of the Adviser, the use of an affiliated broker-dealer is
likely to result in price and execution at least as favorable as those of
other qualified broker-dealers, and if, in the transaction, the affiliated
broker-dealer charges the Fund a fair and reasonable rate. Furthermore, the
Trustees of the Company, including a majority of the Trustees who are not
"interested" Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to PSI are
consistent with the foregoing standard. In accordance with Section 11(a) under
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation in a written contract executed by the Fund and Prudential
Securities. Section 11(a) provides that Prudential Securities must furnish to
the Fund at least annually a statement setting forth the total amount of all
compensation retained by Prudential Securities from transactions effected for
the Fund during the applicable period. Brokerage transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed by
applicable law.
The Funds may use PSI and other affiliated broker-dealers as a futures
commission merchant in connection with entering into futures contracts and
options on futures contracts if, in the judgment of a Fund's Adviser, the
affiliated broker-dealer charges the Fund a fair and reasonable rate. This
standard would allow PSI to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction.
The Company does not market its shares through intermediary brokers or
dealers; therefore, it is not the Company's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be made
through such firms. However, the Advisers may place portfolio orders with
qualified broker-dealers who recommend the Company to clients, and may, when a
number of brokers and dealers can provide best price and execution on a
particular transaction, consider such recommendations by a broker or dealer in
selecting among broker-dealers.
B-18
<PAGE>
Transactions in options and futures by a Fund will be subject to
limitations established by each of the exchanges and boards of trade governing
the maximum position which may be written or held by a single investor or
group of investors acting in concert, regardless of whether the options and
futures are written or held on the same or different exchanges or are written
or held in one or more accounts or though one or more brokers. Thus, the
number of options and futures which a Fund may write or hold may be affected
by options and futures written or held by the Adviser and other investment
advisory clients of the Adviser. An exchange or board of trade may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The Funds will not purchase any security, including U.S. Government
securities, during the existence of any underwriting or selling group relating
thereto of which PSI is a member, except to the extent permitted by SEC rules.
During the period from commencement of each Fund's operations through
September 30, 1993, the Company paid $1,528 in brokerage commissions to
Prudential Securities Incorporated.
Taxes
The following is a brief summary of some of the tax considerations
affecting the Company, its Funds and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign income
tax considerations. Neither this discussion nor the tax discussion in the
Prospectus is intended to substitute for careful individual tax planning.
Accordingly, potential investors are urged to consult their own tax advisers
with specific reference to their own tax situation.
Tax Consequences to the Funds
As a separate entity for federal tax purposes, each Fund will be required
to qualify separately for tax treatment as a regulated investment company
("RIC") under subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). If so qualified, each Fund will not be subject to federal income
taxes with respect to net investment income and net realized capital gains, if
any, that are distributed to its shareholders. In order to qualify as a RIC,
each Fund will have to meet diversification, distribution and certain other
requirements set forth in the Code. If, in any year, a Fund should fail to
qualify under subchapter M for tax treatment as a RIC, the Fund would incur a
regular federal corporate income tax on its taxable income, if any, for that
year.
Income and Diversification Requirements. The diversification tests
require each Fund to (i) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock or securities
or foreign currencies, or other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (ii) derive
B-19
<PAGE>
less than 30% of its gross income in each taxable year from the sale or other
disposition of (A) stock or securities held for less than three months,
(B) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) held for less than three months, and
(C) foreign currencies (or options, futures or forward contracts on foreign
currencies) held for less than three months but only if such currencies (or
options, futures or forward contracts) are not directly related to the Fund's
principal business of investing in stock or securities (or options or futures
with respect to stock or securities); and (iii) diversify its holdings so
that, at the end of each quarter of its taxable year, (A) at least 50% of the
value of the Fund's total assets is represented by cash and cash items, U.S.
Government securities, securities of other RICs, and other securities, with
such other securities limited, in respect of any one issuer, to an amount not
greater in value than 5% of the Fund's total assets and not more than 10% of
the outstanding voting securities of such issuer, and (B) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities).
Distribution Requirement. The distribution tests require each Fund to
distribute (or be deemed to have distributed) 90% or more of its net
investment income for each taxable year.
Zero Coupon Securities and Original Issue Discount. The Funds may invest
in zero coupon securities and other securities which may be subject to the
original issue discount provisions of the Code. Such securities generate
current income subject to the RIC distribution requirements without providing
cash available for distribution. The Funds do not anticipate that such
investments will adversely affect their ability to meet the distribution
requirements.
Foreign Investments. If the International Stock Fund or any other Fund
purchases shares in certain foreign investment entities called "passive
foreign investment companies" ("PFICs"), the Fund may be subject to U.S.
federal income tax on a portion of any "excess distribution" or gain from the
disposition of such shares even if such income is distributed as a dividend by
the Fund to its shareholders. Because a credit for this tax could not be
passed through to shareholders, the tax effectively would reduce the Fund's
economic return from its PFIC investment. Additional charges in the nature of
interest may be imposed on a PFIC investor in respect of deferred taxes
arising from such distributions or gains. If a Fund were to invest in a PFIC
and elected to treat the PFIC as a "qualified electing fund" under the Code,
in lieu of the foregoing requirements, the Fund might be required to include
in income each year a portion of the ordinary earnings and net capital gains
of the qualified electing fund, even if not distributed to the Fund, and such
amounts would be subject to the RIC distribution requirements. Management of
the Company will consider these potential tax consequences in evaluating
whether to invest in a PFIC.
Net investment income or capital gains earned by the Funds investing in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Funds to a reduced rate of tax or exemption from
tax on this related income and gains. It is impossible to determine the
effective rate of foreign tax in advance since the amount
B-20
<PAGE>
and the countries in which these Funds' assets will be invested are not known.
The Funds intend to operate so as to qualify for treaty-reduced rates of tax
where applicable.
Currency Fluctuations - Section 988 Gains and Losses. Under the Code,
gains or losses attributable to fluctuations in exchange rates between the
time a Fund accrues income or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time a Fund actually
collects such receivables or pays such liabilities, will generally be treated
as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of foreign currencies or debt securities held by a Fund, if any,
denominated in a foreign currency, to the extent attributable to fluctuations
in exchange rates between the acquisition and disposition dates, will also be
generally treated as ordinary income or loss. These gains and losses are
referred to under the Code as "Section 988" gains and losses.
Furthermore, foreign currency gains and losses attributable to certain
forward contracts, futures contracts that are not "regulated futures
contracts," equity options and unlisted non-equity options will also be
treated as Section 988 gains and losses. (In certain circumstances, however,
the Company may elect capital gain or loss treatment for such transactions.)
Section 988 gains and losses will increase or decrease the amount of the
Company's net investment income available for distribution. The Company does
not anticipate that any Section 988 gains and losses the Funds may realize
will adversely affect the ability of the Funds to qualify as regulated
investment companies under the Code.
Option and Futures Transactions. Under Section 1256 of the Code, gain or
loss on certain options, futures contracts, options on futures contracts and
forward contracts ("Section 1256 contracts") will be treated as 60% long-term
and 40% short-term capital gain or loss ("blended gain or loss"). In addition,
Section 1256 contracts held by a Fund at the end of each taxable year will be
required to be treated as sold at fair market value on the last day of such
taxable year for U.S. federal income tax purposes and the resulting gain or
loss will be treated as blended gain or loss and will affect the amount of
distributions required to be made by a Fund in order to satisfy its
distribution requirements.
Offsetting positions held by a Fund involving certain futures and options
transactions may be considered to constitute, for federal income tax purposes,
"straddles" which are subject to special rules under the Code. Under these
rules, depending on different elections which may be made by the Company, the
amount, timing and character of gain and loss realized by the Company and its
shareholders may be affected.
B-21
<PAGE>
Tax Consequences to Shareholders
Ordinarily, distributions of net investment income of a RIC would be
taxable to shareholders as ordinary income dividends to the extent of the
earnings and profits of the RIC. To the extent that a distribution exceeds the
RIC's earnings and profits, it would be treated as a nontaxable return of
capital to the extent of the shareholder's tax basis in the shares of the RIC.
Distributions of net capital gains would be taxable as long-term capital
gains. The rules discussed in this paragraph generally apply regardless of the
length of time a shareholder holds the shares of the RIC.
The Company's present intention is to offer the Funds primarily through
qualified retirement plans. The Funds intend to satisfy their distribution
requirements by distributions in the form of additional shares to the plans.
However, shareholders may redeem their shares, including shares received as
dividends, at any time for cash. Distributions are generally not taxable to
the participants in the plans. Distributions from a qualified retirement plan
to a participant or beneficiary are subject to special rules related to such
distributions. Because the effect of these rules varies greatly with
individual situations, potential investors are urged to consult their own tax
advisers.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Company may quote a Fund's yield or total return
in advertisements or in advertisements, sales literature, reports and other
communications to shareholders.
Calculation of Money Market Fund Yield
The Money Market Fund will prepare a current quotation of yield daily.
The yield quoted will be the simple annualized yield for an identified
seven-calendar-day period. The yield calculation will be based on a
hypothetical account having a balance of exactly one share at the beginning of
the seven-day period. The base return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the shares, but excluding any
capital changes. The yield will vary as interest rates and market conditions
change. Yield also depends on the quality, length of maturity and type of
instruments in the Money Market Fund, and its operating expenses. The Fund may
also prepare an effective annual yield computed by compounding the
unannualized seven-day period return as follows: by adding 1 to the
unannualized seven-day period return, raising the sum to a power equal to 365
divided by 7, and subtracting 1 from the result. The Fund's seven-day yield
and effective yield as of September 30, 1993 was 2.72% and 2.76%,
respectively.
B-22
<PAGE>
Calculation of Fund Performance (except Money Market Fund)
Yield
The Income Fund's 30-day yield is calculated according to a formula
prescribed by the SEC, expressed as follows:
6
YIELD = 2[(a-b + 1) - 1]
---
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period.
c = the average daily number of shares
outstanding during the period that were entitled to
receive dividends.
d = the maximum offering price per share on
the last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates,
a Fund's yield will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, the inflow of net new money to a
Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its portfolio of
securities, thereby reducing the current yield of the Fund. In periods of
rising interest rates the opposite can be expected to occur. The yield for the
30-day period ended September 30, 1993 for the Income Fund was 4.75%.
Average Annual Total Return
A Fund's "average annual total return" is computed according to a formula
prescribed by the SEC, expressed as follows:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
B-23
<PAGE>
ERV = Ending Redeemable Value ("ERV") of a
hypothetical $1,000 investment made at
the beginning of a 1-, 5- or 10-year
period at the end of a 1-, 5- or 10-year
period (or fractional portion thereof),
assuming reinvestment of all dividends
and distributions and the effect of the
maximum annual fee for participation in
the Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. A Fund's net investment income changes in
response to fluctuations in interest rates and the expenses of the Fund. The
Average Annual Total Return for the period from commencement of each Fund's
operations through September 30, 1993 was: Growth Stock, 23.80%; Stock Index,
13.09%; International Stock, 26.66%; Active Balanced, 14.51%; Balanced,
20.81%; and Income, 10.64%. These amounts are computed by assuming a
hypothetical initial payment of $1,000. It was then assumed that all of the
dividends and distributions paid by the Fund over the relevant time period
were reinvested. It was then assumed that at the end of the time period, the
entire amount was redeemed.
Aggregate Total Return
A Fund's aggregate total return represents the cumulative change in the
value of an investment in the Fund for the specified period and are computed
by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$1,000.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made at
the beginning of the 1-, 5-or 10-year
period (or fractional portion thereof),
assuming reinvestment of all dividends
and distributions and the effect of the
maximum annual fee for participation in
the Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
A Fund's net investment income changes in response to fluctuations in
interest rates and the expenses of the Fund. Consequently, the given
performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
B-24
<PAGE>
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis
for comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities. The aggregate total return for the period
from commencement of each Fund's operations through September 30, 1993 was:
Growth Stock, 21.22%; Stock Index, 11.73%; International Stock, 23.74%; Active
Balanced, 10.50%; Balanced 18.58%; and Income, 6.11%.
OTHER INVESTMENT PRACTICES, RISK CONDITIONS,
AND POLICIES OF THE FUNDS
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which the Funds may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. Government,
including the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the U.S., Small Business Administration, Government
National Mortgage Association ("GNMA"), General Services Administration,
Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate
Credit Banks, Federal Land Banks, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, District of
Columbia Armory Board, Student Loan Marketing Association and Resolution Trust
Corporation. Direct obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. Because the U.S. Government is not obligated by law to provide
support to an instrumentality that it sponsors, a Fund will invest in
obligations issued by an instrumentality of the U.S. Government only if the
Fund's Adviser determines that the instrumentality's credit risk does not
render its securities unsuitable for investment by the Fund. For further
information, see "Mortgage-Related Securities" below.
Repurchase Agreements and Reverse Repurchase Agreements
A Fund may enter into repurchase and reverse repurchase agreements with
banks and securities dealers which meet the creditworthiness standards
established by the Company's Trustees ("Qualified Institutions"). The Adviser
will monitor the continued creditworthiness of Qualified Institutions, subject
to the oversight of the Company's Trustees. The resale price of the securities
purchased reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon
B-25
<PAGE>
rate or date of maturity of the purchased security. The Fund receives
collateral equal to the repurchase price plus accrued interest, which is
marked-to-market daily. These agreements permit the Fund to keep all its
assets earning interest while retaining "overnight" flexibility to pursue
investments of a longer-term nature.
The use of repurchase agreements and reverse repurchase agreements
involve certain risks. For example, if the seller of securities under a
repurchase agreement defaults on its obligation to repurchase the underlying
securities, as a result of its bankruptcy or otherwise, the Fund will seek to
dispose of such securities, which action could involve costs or delays. If the
seller becomes insolvent and subject to liquidation or reorganization under
applicable bankruptcy or other laws, the Fund's ability to dispose of the
underlying securities may be restricted. Finally, it is possible that the Fund
may not be able to substantiate its interest in the underlying securities. To
minimize this risk, the securities underlying the agreement will be held by
the Custodian at all times in an amount at least equal to the repurchase
price, including accrued interest. If the counterparty fails to resell or
repurchase the securities, the Fund may suffer a loss to the extent proceeds
from the sale of the underlying collateral is less than the repurchase price.
Reverse repurchase agreements involve the risk that the market value of the
securities retained in lieu of sale by the Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase.
Debt Securities
In general, the ratings of Moody's Investors Service ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff and Phelps, Inc. ("Duff & Phelps")
and other nationally recognized statistical rating organizations ("NRSROs")
represent the opinions of those organizations as to the quality of debt
obligations that they rate. These ratings are relative and subjective, are not
absolute standards of quality and do not evaluate the market risk of
securities. These ratings will be among the initial criteria used for the
selection of portfolio securities. Among the factors that the rating agencies
consider are the long-term ability of the issuer to pay principal and interest
and general economic trends.
Subsequent to its purchase by a Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt
obligation by the Fund, but the Fund's Adviser will consider the event in its
determination of whether the Fund should continue to hold the obligation. In
addition, to the extent that the ratings change as a result of changes in
rating organizations or their rating systems or owing to a corporate
restructuring of Moody's, S&P, Duff & Phelps or other NRSRO, the Fund will
attempt to use comparable ratings as standards for its investments in
accordance with its investment objectives and policies. The Appendix to this
Statement of Additional Information contains further information concerning
the ratings of Moody's, S&P and Duff & Phelps and their significance.
B-26
<PAGE>
All Funds, except the Money Market Fund and the Stock Index Fund may
invest, to a limited extent, in medium, lower-rated and unrated debt
securities. Debt securities rated in the lowest category of investment grade
debt (i.e., Baa by Moody's or BBB by S&P) may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds.
Non-investment grade fixed income securities are rated lower than Baa/BBB
(or the equivalent rating or, if not rated, determined by the relevant Adviser
to be of comparable quality to securities so rated) and are commonly referred
to as high risk or high yield securities or "junk" bonds. High yield
securities are generally riskier than higher quality securities and are
subject to more credit risk, including risk of default, and the prices of such
securities are more volatile than higher quality securities. Such securities
may also have less liquidity than higher quality securities. None of the Funds
is authorized to invest in excess of 5% of its net assets in non-investment
grade fixed income securities.
The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are
traded are generally more limited than those in which higher-rated securities
are traded. The existence of limited markets may make it more difficult for
the Funds to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Moreover, the lack of liquid
trading market may restrict the availability of debt securities for a Fund to
purchase and may also have the effect of limiting the ability of a Fund to
sell debt securities at their fair value either to meet redemption requests or
to respond to changes in the economy or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of fixed income
securities moves inversely with movements in interest rates, in the event of
rising interest rates, the value of the securities held by a Fund may decline
proportionately more than a Fund consisting of higher-rated securities.
Investments in zero coupon bonds may be more speculative and subject to
greater fluctuations in value due to changes in interest rates than bonds that
pay interest currently. If a Fund experiences unexpected net redemptions, it
may be forced to sell its higher-rated bonds, resulting in a decline in the
overall credit quality of the securities held by the Fund and increasing the
exposure of the Fund to the risks of lower-rated securities.
When-Issued and Delayed Delivery Securities
To secure prices deemed advantageous at a particular time, each Fund
(except the Money Market Fund) may purchase securities on a when-issued or
delayed delivery basis, in which case delivery of the securities occurs beyond
the normal settlement period; payment for or delivery of the
B-27
<PAGE>
securities would be made at the same time or prior to the reciprocal delivery
or payment by the other party to the transaction. A Fund will enter into
when-issued or delayed delivery transactions for the purpose of acquiring
securities and not for the purpose of leverage. When-issued securities
purchased by a Fund may include securities purchased on a "when, as and if
issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed delivery basis may
expose a Fund to risk because the securities may experience fluctuations in
value prior to their actual delivery. A Fund does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed delivery
basis may involve the additional risk that the yield available in the market
when the delivery takes place may be higher than that obtained in the
transaction itself.
Forward Rolls and Dollar Rolls
Forward roll and dollar roll transactions involve the risk that the
market value of the securities sold by a Fund may decline below the repurchase
price of those securities. At the time the Fund enters into a forward roll
transaction, it will place in a segregated account with its Custodian cash,
U.S. Government securities and other liquid high grade debt securities having
a value equal to the repurchase price (including accrued interest) and will
subsequently mark the account to market.
Mortgage-Related Securities
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental
issuers, such as commercial banks, savings and loan associations and private
mortgage insurance companies. Governmental mortgage-backed securities are
backed by the full faith and credit of the United States. GNMA, the principal
U.S. guarantor of such securities, is a wholly-owned U.S. governmental
corporation within the Department of Housing and Urban Development.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA. FHLMC is a corporate instrumentality of the
United States, the stock of which is owned by the Federal Home Loan Banks.
Participation certificates representing interests in mortgages from FHLMC's
national portfolio are guaranteed as to the timely payment of interest and
either ultimate or timely collection of principal by FHLMC.
The Funds expect that private and governmental entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may be
B-28
<PAGE>
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, the Funds, consistent with their
respective investment objectives and policies, will consider making
investments in those new types of securities.
The Funds may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private
issuers. These securities bear interest at a rate that is adjusted monthly,
quarterly or annually. The prepayment experience of the mortgages underlying
these securities may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In
addition, a pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments include the
level of interest rates, general economic and social conditions, the location
of the mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that
prepayments will result in an average life ranging from two to ten years for
pools of fixed rate 30-year mortgages. Pools of mortgages with other
maturities or different characteristics will have varying average life
assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest
rates. To the extent that a Fund purchases mortgage-related securities at a
premium, unscheduled prepayments, which are made at par, will result in a loss
equal to any unamortized premium.
Government stripped mortgage-related interest-only ("IOs") and principal
only ("POs") securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no
assurance that a Fund will be able to effect a trade of IOs or POs at a time
when it wishes to do so. The Funds will acquire IOs and POs only if, in the
opinion of the Fund's Adviser, a secondary market for the securities exists at
the time of acquisition, or is subsequently expected. A Fund will treat IOs
and POs that are not U.S. Government securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, to
not more than 15% (10% in the case of the Money Market Fund) of its net
assets. With respect to IOs and POs that are issued by the U.S. Government,
the Advisers, subject to the supervision of the Trustees, may determine that
such securities are liquid, if they determine the securities can be disposed
of promptly in the ordinary course of business at a value reasonably close to
that used in the calculation of net asset value per share.
B-29
<PAGE>
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing
the securities. If a decline in the level of prevailing interest rates results
in a rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs
and increasing the yield to maturity on POs. Sufficiently high prepayment
rates could result in a Fund not fully recovering its initial investment in an
IO.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the
Fund's Adviser, the investment restriction limiting a Fund's investment in
illiquid instruments will apply.
Collateralized Mortgage Obligations
The Funds also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
always are parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
In reliance on an SEC interpretation, the Funds' investments in certain
qualifying CMOs, including CMOs that have elected to be treated as Real Estate
Mortgage Investment Conduits (REMICs), are not subject to the 1940 Act's
limitation on acquiring interests in other investment companies. In order to
be able to rely on the SEC's interpretation, the CMOs and REMICs must be
unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-backed
securities, (ii) do not issue redeemable securities, (iii) operate under
general exemptive orders exempting them from all provisions of the 1940 Act,
and (iv) are not registered or regulated under the 1940 Act as investment
companies. To the extent that a Fund selects CMOs or REMICs that do not meet
the above requirements, the Fund may not invest more than 10% of its assets in
all such entities and may not acquire more than 3% of the voting securities of
any single such entity.
Asset-Backed Securities
The value of these securities may change because of changes in the
market's perception of the creditworthiness of the servicing agent for the
pool, the originator of the pool, or the financial institution providing
credit support enhancement for the pool.
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Custodial Receipts
Each Fund, other than the Growth Stock Fund, the Stock Index Fund, the
International Fund and the Money Market Fund, may acquire custodial receipts
or certificates, such as CATS, TIGRs and FICO Strips, underwritten by
securities dealers or banks, that evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, authorities or instrumentalities. The
underwriters of these certificates or receipts purchase a U.S. Government
security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the U.S. Government security. Custodial receipts
evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities.
There are a number of risks associated with investments in custodial
receipts. Although, typically, under the terms of a custodial receipt, a Fund
is authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund may be required to assert through the
custodian bank such rights as may exist against the underlying issuer. Thus,
in the event the underlying issuer fails to pay principal and/or interest when
due, a Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
Securities Lending
A Fund will enter into securities lending transactions only with
Qualified Institutions. A Fund will comply with the following conditions
whenever it lends securities: (i) the Fund must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the value of the
loan is "marked-to-market" on a daily basis; (iii) the Fund must be able to
terminate the loan at any time; (iv) the Fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on the
loaned securities and any increase in market value; (v) the Fund may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights
on the loaned securities may pass to the borrower except that, if a material
event adversely affecting the investment in the loaned securities occurs, the
Fund must terminate the loan and regain the right to vote the securities. A
Fund may pay reasonable finders', administrative and custodial fees in
connection with a loan of its securities. In these transactions, there are
risks of delay in recovery and in some cases even of loss of rights in the
collateral should the borrower of the securities fail financially.
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Borrowing
A Fund (except for the Money Market Fund) may borrow from time to time,
at its Adviser's discretion, to take advantage of investment opportunities,
when yields on available investments exceed interest rates and other expenses
of related borrowing, or when, in the Adviser's opinion, unusual market
conditions otherwise make it advantageous for the Fund to increase its
investment capacity. A Fund will only borrow when there is an expectation that
it will benefit the Fund after taking into account considerations such as
interest income and possible losses upon liquidation. Borrowing by a Fund
creates an opportunity for increased net income but, at the same time, creates
risks, including the fact that leverage may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund. A Fund may also
borrow for temporary, extraordinary or emergency purposes and for the
clearance of transactions.
Securities of Foreign Issuers
The value of a Fund's foreign investments may be significantly affected
by changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of a
Fund's assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which the Stock Index Fund and
other Funds may invest are not as developed as the economy of the U.S. and may
be subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation, and limitations on the removal of
funds or other assets, could also adversely affect the value of investments.
Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by a Fund may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.
Brokerage commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S. are likely to be
higher. The securities markets in many of the countries in which a Fund may
invest will have substantially less trading volume than the principal U.S.
markets. As a result, the securities of some companies in these countries may
be less liquid and more volatile than comparable U.S. securities. There is
generally less government regulation and
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supervision of foreign stock exchanges, brokers and issuers which may make it
difficult to enforce contractual obligations.
Liquidity Puts
Each Fund, other than the Growth Stock Fund and the Stock Index Fund, may
purchase instruments together with the right to resell the instruments at an
agreed-upon price or yield, within a specified period prior to the maturity
date of the instruments. This instrument is commonly known as a "put bond" or
a "tender option bond."
Consistent with each Fund's investment objective, a Fund may purchase a
put so that it will be fully invested in securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the put. A Fund will generally exercise the puts or
tender options on their expiration date when the exercise price is higher than
the current market price for the related fixed income security. Puts or tender
options may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund
shares and from recent sales of portfolio securities are insufficient to meet
such obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
the event the Adviser for the Fund revises its evaluation of the
creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts or tender options prior to their expiration date and
in selecting which puts or tender options to exercise in such circumstances,
the Fund's Adviser considers, among other things, the amount of cash available
to the Fund, the expiration dates of the available puts or tender options, any
future commitments for securities purchases, the yield, quality and maturity
dates of the underlying securities, alternative investment opportunities and
the desirability of retaining the underlying securities in the Fund.
These instruments are not deemed to be "put options" for purposes of any
Fund's investment restriction.
Options on Securities and Securities Indices
The Funds write only "covered" options. This means that so long as a Fund
is obligated as the writer of a call option, it will (i) own the securities
subject to the option; (ii) have an absolute and immediate right to acquire
those securities without additional cash consideration upon conversion or
exchange of other securities held in its portfolio or with additional cash
consideration, upon conversion or exchange, provided that such additional cash
consideration is maintained in a segregated account; (iii) hold a call option
on the same security with an exercise price no higher than the exercise price
of the call sold or, if higher, deposit and maintain the differential in
liquid assets in a segregated account with its Custodian; or (iv) deposit and
maintain with its Custodian in a segregated
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account cash, U.S. Government securities or other liquid high-grade debt
securities, having a value that, when added to any amounts deposited with, or
on behalf of, a broker as margin, equal the market value of the instruments
underlying the call. A Fund is considered "covered" with respect to a put it
writes if, so long as it is obligated as the writer of a put, it (i) deposits
and maintains with its Custodian in a segregated account liquid assets having
a value equal to or greater than the exercise price of the option or
(ii) holds a put on the same security with an exercise price no lower than the
exercise price of the put sold or, if lower, the Fund deposits and maintains
the differential in liquid assets in a segregated account with its Custodian.
The Funds will also use such other cover as is permitted by the Staff of the
Securities and Exchange Commission.
A number of risk factors are associated with options transactions. There
is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, at any particular time. If a Fund is unable
to effect a closing purchase transaction with respect to covered options it
has written, a Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if a Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the
options in order to realize any profit and may incur transaction costs upon
the purchase or sale of underlying securities. The ability to terminate
over-the-counter option positions is more limited than the ability to
terminate exchange-traded option positions because the predominant market is
the issuing broker rather than an exchange. There is a risk that
broker-dealers participating in such transactions will not fulfill their
obligations.
A Fund pays brokerage commissions or spreads in connection with its
options transactions, as well as for purchases and sales of underlying
securities. The writing of options could result in significant increases in a
Fund's turnover rate. A Fund's transactions in options may be limited by the
requirements of the Internal Revenue Code for qualification as a regulated
investment company.
A Fund will not (i) write puts having aggregate exercise prices greater
than 25% of total assets, or (ii) purchase put options or call options, after
any such purchase, the aggregate premiums paid for such options would exceed
10% of the Fund's total assets. The aggregate value of the obligations
underlying put options will not exceed 25% of a Fund's assets.
Futures Contracts and Options On Futures Contracts
A futures contract on securities or currency is an agreement to buy and
sell securities or currency at a specified price at a designated date. Futures
contracts and options thereon may be entered into for hedging and other risk
management purposes. A Fund may enter into futures contracts in order to hedge
against changes in interest rates, stock market prices or currency exchange
rates or for other risk management purposes. A Fund does
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<PAGE>
not make payment or deliver securities on entering into a futures contract.
Instead, it makes a margin deposit, which is adjusted to reflect changes in
the value of the contract and which continues until the contract is
terminated.
In instances involving the purchase of a futures contract by a Fund, an
amount of cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to the Fund's obligation under the futures
contract, will be deposited in a segregated account with the Company's
Custodian and/or in a margin account with a futures broker to collateralize
the position and thereby insure that the use of the futures contract is
unleveraged.
A Fund may enter into closing purchase or sale transactions in order to
terminate futures contracts and future options contracts. There is no
guarantee that such closing transactions can be effected. A Fund's ability to
enter into closing transactions depends on the development and maintenance of
a liquid market, which may not be available at all times.
A Fund may only write covered put and call options on futures contracts.
A Fund is considered "covered" with respect to a call option it writes on a
futures contract if the Fund (i) owns a long position in the underlying
futures contract; (ii) segregates and maintains with its Custodian liquid
assets equal in value to the exercise price of the call (less any initial
margin deposited); (iii) owns a security which is deliverable under the
futures contract; or (iv) owns an option to purchase a security which is
deliverable under the futures contract or owns a call option to purchase the
underlying futures contract, in each case at a price no higher than the
exercise price of the call option written by the Fund, or if higher, the Fund
deposits and maintains the differential between the two exercise prices in
liquid assets in a segregated account with its Custodian. A Fund is considered
"covered" with respect to a put option it writes on a futures contract if it
(i) segregates and maintains with its Custodian liquid assets equal in value
to the exercise price of the put (less any initial and variation margin
deposited); (ii) owns a put option on the security which is subject of the
futures contract or owns a put option on the futures contract underlying the
option, in each case at an exercise price as high or higher than the price of
the contract held by the Fund, or if lower, the Fund deposits and maintains
the differential between the two exercise prices in liquid assets in a
segregated account with its Custodian; or (iii) owns a short position in the
underlying futures contract. The Funds will also use such other cover as may
be permitted by the Staff of the Securities and Exchange Commission.
A Fund may write covered straddles of options on futures. A straddle is a
combination of a call and a put written on the same underlying futures
contract. A straddle will be covered when sufficient assets are deposited to
meet the requirements, as defined in the preceding paragraph, for the call and
put options on the futures contract when each side is evaluated independently.
Under certain circumstances, the same assets may be used to cover both the
call and put options on the futures contract underlying the straddle.
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<PAGE>
Although transactions in futures and options thereon are intended to
enable the Funds to manage interest rate, stock market or currency exchange
risks, unanticipated changes in the prices or rates could result in poorer
performance than if the Funds had not entered into these transactions. Even if
the Fund Adviser correctly predicts interest rate, market price or currency
rate movements, a hedge could be unsuccessful if changes in the value of a
Fund's futures position do not correspond to changes in the value of its
investments. This lack of correlation between a Fund's futures (or options)
positions and its securities or currency positions may be caused by
differences between the futures and securities or currency markets or by
differences between the securities underlying the Fund's futures (or options)
position and the securities held by or to be purchased by the Fund. The
Advisers will attempt to minimize these risks though careful selection and
monitoring of each Fund's futures and options positions. The ability to
predict the direction of the securities markets, interest rates and currency
exchange rates involves skills different from those used in selecting
securities.
A Fund will incur brokerage costs on futures trades and will be required
to post and maintain margin as a good-faith deposit against performance of its
obligations under futures contracts and under options written by the Fund.
Futures and options positions are marked-to-market daily and the Fund may be
required to make subsequent "variation" margin payments depending upon whether
its positions increase or decrease in value. In this context, margin payments
involve no borrowing on the part of the Fund.
Foreign Currency Forward Contracts, Options and Futures Transactions
There is no limitation on the value of forward contracts into which a
Fund may enter. However, a Fund's transactions in forward contracts will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of a forward contract
with respect to specific receivables or payables of the Fund generally arising
in connection with the purchase or sale of its securities and accruals of
interest or dividends receivable and Fund expenses. Position hedging is the
sale of a foreign currency with respect to security positions denominated or
quoted in that currency. A Fund may not position hedge with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of a forward contract) of
securities, denominated or quoted in, or currently convertible into, such
currency. A forward contract generally has no deposit requirements, and no
commissions are charged for such trades.
A Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when a Fund contracts for
the purchase or sale of a security denominated in a foreign currency, (ii)
when a Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds. By entering into a forward
contract for a fixed amount of dollars for the purchase or sale of the amount
of foreign currency involved in the underlying transaction, a Fund will be
able to protect itself against a possible loss
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<PAGE>
resulting from an adverse change in the relationship between the U.S. dollar
and the subject foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
Additionally, when a Fund's Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract, for a fixed amount of dollars, to sell
the amount of foreign currency approximating the value of some or all of the
securities of the Fund denominated in such foreign currency. Further, a Fund
may enter into a forward contract in one foreign currency, to hedge against
the decline in value in another foreign currency.
Forward currency contracts (i) are traded in an interbank market
conducted directly between currency traders (typically commercial banks or
other financial institutions) and their customers, (ii) generally have no
deposit requirements and (iii) are typically consummated without payment of
any commissions.
A Fund may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) for
hedging purposes in a manner similar to that in which forward foreign currency
exchange contracts and futures contracts on foreign currencies will be
employed. Options on foreign currencies are similar to options on securities,
except that a Fund has the right to take or make delivery of a specified
amount of foreign currency, rather than securities.
If a Fund's Adviser anticipates purchasing a foreign security and also
anticipates a rise in the value of such foreign currency (thereby increasing
the cost of such security), the Fund may purchase call options on the foreign
currency. The purchase of such options could offset, at least partially, the
effects of the adverse movements of the exchange rates. Alternatively, the
Fund could write a put option on the currency and, if the exchange rates move
as anticipated, the option would expire unexercised.
These practices are subject to various additional risks. The correlation
between movements in the price of options and futures contracts and the price
of the currencies being hedged is imperfect. The use of these instruments will
hedge only the currency risks associated with investments in foreign
securities, not market risks. In addition, if a Fund purchases these
instruments to hedge against currency advances before it invests in securities
denominated in such currency and the currency market declines, the Fund might
incur a loss on the futures contract. A Fund's ability to establish and
maintain positions will depend on market liquidity. The ability of a Fund to
close out a futures position or an option depends upon a liquid secondary
market. There is no assurance that liquid secondary markets will exist for any
particular futures contract or option at any particular time.
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<PAGE>
Illiquid Securities
A Fund may not invest more than 5% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments.
Rule 144A of the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this new
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers,
such as the PORTAL System sponsored by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Advisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, Advisers will consider, inter alia, the
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following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition,
in order for commercial paper that is issued in reliance on Section 4(2) of
the Securities Act to be considered liquid, (i) it must be rated in one of the
two highest rating categories by at least two nationally recognized
statistical rating organizations (NRSRO), or if only one NRSRO rates the
securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser, and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
Other Investment Techniques
In order to protect the value of the Funds from interest rate
fluctuations, the Balanced Fund and the Income Fund may enter into interest
rate swaps. The Funds intend to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Fund anticipates at a later date. In addition, the Income Fund may, with
respect to less than 5% of its net assets, engage in the purchase or sale of
interest rate caps, floors and collars. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the party selling such interest rate floor.
A Fund may enter into instruments, such as interest rate swaps, total
return swaps, caps and floors, on either an asset-based or liability-based
basis, depending on whether it is hedging its assets or its liabilities. The
Income Fund will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The Balanced Fund
may only enter into interest rate swaps on a net basis. Inasmuch as these
techniques are entered into for good faith hedging purposes, the Manager and
each Adviser believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to a Fund's borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Custodian, subject to review by the
Company's Trustees of the Adviser's credit standards for counterparties. If
there is a default
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by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction.
Each Fund may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments which are not presently
contemplated for use by such Fund or which are not currently available but
which may be developed, to the extent such opportunities are both consistent
with its investment objective and legally permissible for the Fund. Before
entering into such transactions or making any such investment, the Fund will
provide appropriate disclosure in its prospectus.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Company
as fundamental policies of the Funds, except as otherwise indicated. Under the
1940 Act, a fundamental policy of a Fund may not be changed without the vote
of a majority of the outstanding voting securities of the Fund. As defined in
the 1940 Act, a "majority of a Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are present in person or represented by proxy or
(ii) more than 50% of the outstanding shares. For purposes of the following
limitations: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations does not require elimination of
any asset from Fund.
A Fund may not:
1. Purchase any security if, as a result, with respect to 75% of the
Fund's total assets, more than 5% of the value of its total assets (determined
at the time of investment) would then be invested in the securities of any one
issuer.
2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by the Fund.
3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities
in the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities
and, in the case of the Money Market Fund, to the securities of domestic banks
(including all banks which are organized under the laws of the United States
or a state (as defined in the 1940 Act) and U.S. branches of foreign banks
that are subject to the same regulations as U.S. banks.
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4. Purchase or sell real estate or interests therein (including limited
partnership interests), although a Fund may purchase securities of issuers
which engage in real estate operations and securities which are secured by
real estate or interests therein.
5. Purchase or sell commodities or commodity futures contracts, except
that all Funds (other than the Money Market Fund) may purchase and sell
financial futures contracts and options thereon and that forward contracts are
not deemed to be commodities or commodity futures contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that a Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.
7. Issue senior securities, borrow money or pledge its assets, except
that each Fund may borrow from banks or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% (except for the Balanced Fund, the
Income Fund and the Money Market Fund) of the value of its total assets to
take advantage of investment opportunities, for temporary, extraordinary or
emergency purposes, or for the clearance of transactions and may pledge up to
20% of the value of its total assets to secure such borrowings. The Balanced
Fund and the Income Fund may borrow from banks up to 20% of the value of their
respective total assets for the same purposes and may pledge up to 20% of the
value of their respective total assets to secure such borrowings. In addition,
the Balanced Fund and the Income Fund may engage in investment techniques such
as reverse repurchase agreements, forward rolls and dollar rolls to the extent
that their respective assets dedicated to such techniques combined with the
respective values of their bank borrowings do not exceed 33 1/3% of their
respective total assets. The Money Market Fund may borrow an amount equal to
no more than 20% of the value of its total assets only for temporary,
extraordinary or emergency purposes. For purposes of this restriction, the
purchase or sale of securities on a "when-issued" or delayed-delivery basis;
the purchase and sale of options, financial futures contracts and options
thereon; the entry into repurchase agreements and collateral and margin
arrangements with respect to any of the foregoing, will not be deemed to be a
pledge of assets nor the issuance of senior securities.
8. Make loans except by the purchase of fixed income securities in which
a Fund may invest consistently with its investment objective and policies or
by use of reverse repurchase and repurchase agreements, forward rolls, dollar
rolls and securities lending arrangements.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by any Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)
B-41
<PAGE>
11. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws. The Fund has no limit with respect to
investments in restricted securities.
The Funds will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or development programs.
2. Purchase a security if, as a result, more than 15% (10% in the case of
the Money Market Fund) of its total assets would be invested in securities
which are restricted as to disposition. This restriction shall not apply to
mortgage-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
3. Purchase or retain the securities of any issuer if, to the knowledge
of the Company, any officer or Trustee of the Company or the Company's Manager
or any Adviser owns more than 1/2 of 1% of the outstanding securities of such
issuer, and such officers and/or Trustees, who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer.
4. Purchase warrants if, as a result, the Company would then have more
than 5% of its assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the NYSE or American Stock
Exchange or a major foreign exchange will be limited to 2% of the Company's
total assets (determined at the time of investment). For purposes of this
limitation, warrants acquired in units or attached to securities are deemed to
be without value.
5. Purchase a security if, as a result, more than 5% of the value of its
total assets would be invested in securities of issuers having a record,
together with predecessors, of less than three years of continuous operation
and in equity securities of issuers that are not readily marketable. This
restriction shall not apply to any obligation issued or guaranteed by the
United States Government, its agencies or instrumentalities or to CMOs, other
mortgage-related securities, or asset-backed securities.
6. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
7. Invest in companies for the purpose of exercising control or
management of any other issuer, except in connection with a merger,
consolidation, acquisition or reorganization.
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of a Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However,
B-42
<PAGE>
in the event that a Fund's asset coverage for borrowings falls below 300%, the
Fund will take prompt action to reduce its borrowings, as required by
applicable law.
In order to comply with the rules and regulations of certain State
securities commissions, the Funds have agreed (i) that over-the-counter
options transactions shall be entered into only when such options are not
available on a national securities exchange, and (ii) broker-dealers with whom
the Fund shall enter into such transaction shall have a minimum net worth, at
the time of the transaction is entered into, of $20 million. In addition, the
Fund will only buy and sell puts and calls on securities, stock index futures,
or financial futures or options on financial futures, if such options are
written by other persons, and if;
i) the aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Fund's total net assets; and
ii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's total assets.
CUSTODIAN, TRANSFER AND DIVIDEND
DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Company's portfolio
securities and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Company.
PMF serves as the Transfer Agent and Dividend Disbursing Agent of the
Company through its wholly-owned subsidiary, Prudential Mutual Fund Services,
Inc., Raritan Plaza One, Edison, New Jersey 08837. PMFS provides customary
transfer agency services to the Company, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and
related functions. PMFS is also reimbursed for its out-of-pocket expenses,
including, but not limited to, postage, stationery, printing, allocable
communications expenses and other costs.
B-43
<PAGE>
APPENDIX
DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of these issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
B-44
<PAGE>
A - Bonds are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well-safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Description of Duff & Phelps Bond Ratings:
AAA - Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+, AA, AA- - Bonds rated AA+, AA or AA- are considered to be of high
credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
A+, A, A- - Bonds rated A+, A or A- have protection factors which are
average but adequate; however, risk factors are more variable and greater in
periods of economic stress.
B-45
<PAGE>
BBB+, BBB, BBB- - Bonds rated BBB+, BBB or BBB-have below average
protection factors but are still considered sufficient for prudent investment.
These bonds demonstrate considerable variability in risk during economic
cycles.
BB+, BB, BB- - Bonds rated BB+, BB, or BB-are below investment grade but
are still deemed likely to meet obligations when due. Present or prospective
financial protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently within this
category.
B+, B, B- - Bonds rated B+, B, or B-are below investment grade and possess
the risk that obligations will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for frequent changes in
the rating within this category or into a higher or lower rating grade.
CCC - Bonds rated CCC are well below investment grade securities.
Considerable uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD - Bonds rated DD are defaulted debt obligations. The issuer failed to
meet scheduled principal and/or interest payments.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of Duff & Phelps Commercial Paper Rating:
Duff & Phelps commercial paper ratings are divided into three categories,
ranging from "1" for the highest quality obligations to "3" for the lowest. No
ratings are issued for companies whose paper is not deemed investment grade.
Issues assigned the Duff 1 rating are considered top grade. This category is
further divided into three gradations as follows:
B-46
<PAGE>
Duff 1 plus -- highest certainty of timely payment, short-term liquidity,
including internal operating factors and/or ready access to alternative
sources of funds, is clearly outstanding and safety is just below risk-free
U.S. Treasury short-term obligations; Duff 1 -- very high certainty or timely
payment, liquidity factors are excellent and supported by strong fundamental
protection factors, risk factors are minor; Duff 1 minus-high certainty of
timely payment, liquidity factors are strong and supported by good fundamental
protection factors, risk factors are very small. Issues rated Duff 2 represent
a good certainty of timely payment; liquidity factors and company fundamentals
are sound; although ongoing internal funds needs may enlarge total financing
requirements, access to capital markets is good; risk factors are small. Duff
3 represents a satisfactory grade; satisfactory liquidity and other protection
factors qualify issue as to investment grade; risk factors are larger and
subject to more variation; nevertheless timely payment is expected.
B-47
<PAGE>
THE PRUDENTIAL
GROWTH STOCK FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--59.7%
Automobiles & Trucks--0.2%
3,700 General Motors Corp................ $ 107,762
-----------
Banking--3.3%
11,600 Fleet Financial Group, Inc......... 404,550
49,000 Hibernia Corp...................... 410,375
9,900 Morgan (J.P.) & Co., Inc........... 775,913
-----------
1,590,838
-----------
Chemical--Specialty--1.2%
6,400 Morton International, Inc.......... 560,800
-----------
Computer Software & Services--4.2%
14,600 Computer Associates International,
Inc.............................. 467,200
9,300 Information Resources, Inc.*....... 367,350
8,200 Oracle Systems Corp.*.............. 503,787
5,200 Sybase, Inc.*...................... 349,700
25,900 Symbol Technologies, Inc.*......... 349,650
-----------
2,037,687
-----------
Consumer Goods--1.7%
10,550 Bombay Co.......................... 497,169
6,200 General Nutrition Cos Inc.*........ 305,350
-----------
802,519
-----------
Cosmetics & Soaps--0.8%
6,600 Gillette Co........................ 378,674
-----------
Drugs & Medical Supplies--0.9%
11,900 Biogen, Inc.*...................... 438,813
-----------
Electronics--5.1%
10,600 Adobe Systems, Inc................. 196,100
12,400 Hewlett-Packard Co................. 847,850
9,800 Intel Corp......................... 692,125
4,800 Microsoft Corp.*................... 395,400
Value
Shares Description (Note 1)
- ------------------------------------------------------------
17,000 Novell, Inc.*...................... $ 319,812
-----------
2,451,287
-----------
Financial Services--4.8%
10,200 Dow Jones & Co., Inc............... 336,600
5,700 Federal National Mortgage Assn..... 448,875
6,800 First Financial Mgmt. Corp......... 372,300
7,300 Household International Inc........ 568,488
12,000 Primerica Corp..................... 571,500
-----------
2,297,763
-----------
Food & Beverage--1.5%
18,700 McCormick & Co., Inc............... 409,062
10,400 Sysco Corp......................... 286,000
-----------
695,062
-----------
Health Care Services--3.1%
12,100 United Healthcare Corp............. 830,363
10,300 Value Health, Inc.*................ 352,775
31,000 Wellcome Plc (ADR)................. 317,750
-----------
1,500,888
-----------
Housing Related--0.6%
9,200 Masco Corp......................... 292,100
-----------
Insurance--5.3%
6,100 Chubb Corp......................... 513,163
11,100 Exel Ltd........................... 511,988
3,100 General Re Corp.................... 381,300
11,100 Life Re Corp....................... 280,275
7,700 National Re Corp................... 254,100
11,300 UNUM Corp.......................... 615,850
-----------
2,556,676
-----------
Leisure--2.5%
13,600 Bell Sports Corp.*................. 584,800
15,600 Hasbro, Inc........................ 614,250
-----------
1,199,050
-----------
See Notes to Financial Statements.
B-48
<PAGE>
THE PRUDENTIAL
GROWTH STOCK FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Lodging--1.9%
5,800 Hilton Hotels Corp................. $ 284,200
8,200 Promus Cos., Inc.*................. 619,100
-----------
903,300
-----------
Miscellaneous Basic Industry--1.5%
5,500 Applied Materials, Inc.*........... 394,624
8,400 Roche Holdings Ltd. (ADR).......... 315,013
-----------
709,637
-----------
Petroleum Services--0.7%
13,500 YPF Sociedad Anonima (ADR)*........ 342,563
-----------
Railroads--1.9%
6,200 Union Pacific Corp................. 387,500
Wisconsin Central Transportation
11,000 Corp............................. 514,250
-----------
901,750
-----------
Restaurants--0.7%
7,800 McDonald's Corp.................... 404,624
-----------
Retail--8.1%
7,400 Barnes & Noble Incorporated........ 206,275
9,200 Bed Bath & Beyond, Inc.*........... 296,700
9,800 Federated Department Stores,
Inc.*............................ 189,875
11,600 Fruit of the Loom, Inc.*........... 359,600
8,700 Harcourt General, Inc.............. 390,413
7,433 Home Depot, Inc.................... 286,171
13,800 K mart Corp........................ 332,925
8,700 Kohls Corp.*....................... 417,600
9,200 Shaw Industries, Inc............... 445,050
12,100 TJX Companies, Inc................. 364,513
14,300 Wal-Mart Stores, Inc............... 352,138
7,700 Warnaco Group, Inc.*............... 240,625
-----------
3,881,885
-----------
Technology--3.3%
6,700 AutoDesk, Inc...................... 298,987
9,600 Lam Research Corporation*.......... 328,800
Value
Shares Description (Note 1)
- ------------------------------------------------------------
11,800 Lotus Development Corp.*........... $ 538,375
3,900 Motorola, Inc...................... 393,900
-----------
1,560,062
-----------
Telecommunications--5.2%
5,600 American Telephone & Telegraph
Co............................... 329,700
10,100 Ericsson (L.M.) Telephone Co.,
(ADR)............................ 542,875
1,300 McCaw Cellular Communications,
Inc.*............................ 69,712
21,800 MCI Communications Corp............ 599,500
14,400 Tele-Communications, Inc.*......... 360,900
11,400 Telefonos de Mexico (ADR) S.A...... 575,700
-----------
2,478,387
-----------
Transportation--1.2%
9,600 Consolidated Rail Corp............. 561,600
-----------
Total common stocks
(cost $25,657,981)............... 28,653,727
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- --------
Repurchase Agreement--2.8%
Joint Repurchase Agreement Account
$ 1,347 3.30%, 10/01/93, (Note 5)
(cost $1,347,000)................ 1,347,000
-----------
Total Investments--62.5%
(cost $27,004,981; Note 4)....... 30,000,727
Other assets in excess of
liabilities--37.5%............... 17,997,278
-----------
Net Assets--100%................... $47,998,005
-----------
-----------
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-49
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--94.0%
Aerospace/Defense--1.8%
1,200 Allied-Signal, Inc................. $ 87,450
2,700 Boeing Co.......................... 103,612
300 E-Systems, Inc..................... 13,050
250 General Dynamics Corp.............. 23,031
300 Grumman Corp....................... 11,250
500 Lockheed Corp...................... 31,750
300 Loral Corp......................... 18,750
350 Martin Marietta Corp............... 31,150
300 McDonnell Douglas Corp............. 27,038
400 Northrop Corp...................... 14,050
1,100 Raytheon Co........................ 68,338
1,700 Rockwell International Corp........ 61,200
-----------
490,669
-----------
Airlines--0.3%
650 AMR Corp.*......................... 42,330
400 Delta Airlines, Inc................ 20,850
180 UAL Corp.*......................... 24,705
400 USAir Group, Inc.*................. 5,050
-----------
92,935
-----------
Aluminum--0.4%
1,700 Alcan Aluminum Ltd................. 31,662
700 Aluminum Co. of America............ 46,988
450 Reynolds Metals Co................. 18,731
-----------
97,381
-----------
Automobiles & Trucks--2.6%
2,700 Chrysler Corp...................... 128,588
200 Cummins Engine, Inc................ 16,325
400 Dana Corp.......................... 23,100
400 Echlin, Inc........................ 12,200
3,900 Ford Motor Co...................... 215,475
5,600 General Motors Corp................ 233,800
1,000 Genuine Parts Co................... 37,500
300 Johnson Controls, Inc.............. 16,312
Value
Shares Description (Note 1)
- ------------------------------------------------------------
220 Navistar International Corp.*...... $ 5,225
400 Safety Kleen Corp.................. 6,050
-----------
694,575
-----------
Banking--5.3%
2,725 Banc One Corp...................... 113,088
900 Bank of Boston Corp................ 22,950
2,800 BankAmerica Corp................... 123,200
700 Bankers Trust NY Corp.............. 56,000
800 Barnett Banks, Inc................. 36,000
400 Boatmen's Bancshares............... 25,775
1,400 Chase Manhattan Corp............... 51,975
1,900 Chemical Banking Corp.............. 85,500
2,900 Citicorp*.......................... 110,200
500 CoreStates Financial Corp.......... 28,938
600 First Chicago Corp................. 29,250
600 First Fidelity Bancorp............. 27,825
600 First Interstate Bank Corp......... 39,975
1,300 First Union Corp................... 61,912
1,000 Fleet Financial Group, Inc......... 34,875
500 Golden West Financial Corp......... 21,813
1,000 Great Western Financial Corp....... 19,625
900 H.F. Ahmanson & Co................. 17,888
450 Mellon Bank Corp................... 24,750
1,500 Morgan (J.P.) & Co., Inc........... 117,563
2,000 NationsBank Corp................... 103,000
1,200 NBD Bancorp, Inc................... 41,100
2,200 Norwest Corp....................... 60,775
1,900 PNC Financial Corp................. 58,424
700 Shawmut National Corp.............. 17,150
1,000 Suntrust Banks, Inc................ 44,500
700 U.S. Bancorp....................... 18,463
500 Wells Fargo & Co................... 63,188
-----------
1,455,702
-----------
Beverages--3.3%
300 Adolph Coors Co.................... 6,300
2,200 Anheuser Busch Cos., Inc........... 100,925
200 Brown-Forman Corp.................. 15,975
10,400 Coca-Cola Co....................... 439,400
See Notes to Financial Statements.
B-50
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Beverages, cont'd.
6,400 PepsiCo, Inc....................... $ 250,400
2,900 Seagram Co., Ltd................... 74,312
-----------
887,312
-----------
Chemicals--2.4%
900 Air Products & Chemicals, Inc...... 34,875
750 American Cyanamid Co............... 41,344
2,200 Dow Chemical Co.................... 128,424
5,300 duPont (E.I.) de Nemours & Co...... 246,450
700 Grace (W.R.) & Co.................. 24,238
350 Hercules, Inc...................... 31,894
1,000 Monsanto Co........................ 65,500
500 Nalco Chemical Co.................. 16,938
200 Quantum Chemical Corp.*............ 4,300
500 Rohm & Haas Co..................... 25,188
1,200 Union Carbide Corp................. 23,100
-----------
642,251
-----------
Chemical - Specialty--0.5%
750 Engelhard Corp..................... 19,780
900 Ethyl Corp......................... 15,975
100 First Mississippi Corp............. 875
550 Great Lakes Chemical Corp.......... 39,050
400 Morton International, Inc.......... 35,050
1,000 Praxair, Inc....................... 15,500
300 Raychem Corp....................... 12,788
-----------
139,018
-----------
Commercial Services--0.2%
700 Deluxe Corp........................ 24,850
300 Harland (John H) Co................ 7,688
800 Moore Corp., Ltd................... 14,100
300 Ogden Corp......................... 7,537
-----------
54,175
-----------
Computer Software & Services--1.1%
200 AutoDesk, Inc...................... 8,925
1,100 Automatic Data Processing, Inc..... 55,275
Value
Shares Description (Note 1)
- ------------------------------------------------------------
300 Ceridian Corp.*.................... $ 5,512
1,300 Computer Associates International,
Inc.............................. 41,600
150 Computer Sciences Corp.*........... 13,763
300 Intergraph Corp*................... 3,188
300 Lotus Development Corp.*........... 13,688
2,400 Novell, Inc.*...................... 45,150
1,200 Oracle Systems Corp.*.............. 73,725
800 Sun Microsystems, Inc.*............ 19,250
800 Tandem Computers, Inc.*............ 9,800
-----------
289,876
-----------
Construction--0.2%
700 Fluor Corp......................... 28,700
300 Foster Wheeler Corp................ 9,374
200 Kaufman & Broad Home Corp.......... 3,925
200 Pulte Corp......................... 7,575
-----------
49,574
-----------
Consumer Goods--0.7%
300 Centex Corp........................ 12,638
1,152 Columbia Healthcare Corp........... 33,696
100 Fedders Corp.*..................... 525
300 Fleetwood Enterprises, Inc......... 6,938
550 Lowes Companies, Inc............... 24,818
1,200 Masco Corp......................... 38,100
800 Maytag Corp........................ 13,400
300 Owens Corning Fiberglass Corp.*.... 13,425
100 Skyline Corp....................... 1,688
400 Stanley Works...................... 16,550
600 Whirlpool Corp..................... 35,325
-----------
197,103
-----------
Containers
200 Ball Corp.......................... 6,024
400 Bemis, Inc......................... 9,200
700 Crown Cork & Seal, Inc.*........... 25,025
-----------
40,249
-----------
See Notes to Financial Statements.
B-51
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Cosmetics & Soaps--1.9%
200 Alberto Culver Co.................. $ 4,525
550 Avon Products, Inc................. 28,668
400 Clorox Co.......................... 21,350
1,300 Colgate-Palmolive Co............... 68,250
1,700 Gillette Co........................ 97,538
300 International Flavors & Fragrances,
Inc.............................. 30,488
5,400 Procter & Gamble Co................ 256,500
-----------
507,319
-----------
Diversified Gas--0.2%
900 Arkla, Inc......................... 7,875
800 Coastal Corp....................... 21,900
200 Eastern Enterprises, Inc........... 5,725
500 Enserch Corp....................... 10,374
400 NICOR, Inc......................... 12,200
200 Oneok, Inc......................... 4,450
-----------
62,524
-----------
Drugs & Medical Supplies--6.6%
6,600 Abbott Laboratories................ 180,675
500 ALZA Corp.*........................ 11,063
2,500 American Home Products Corp........ 152,188
1,100 Amgen, Inc.*....................... 42,488
400 Bard (C.R.), Inc................... 9,900
500 Bausch & Lomb, Inc................. 23,500
2,200 Baxter International, Inc.......... 48,400
600 Becton Dickinson & Co.............. 22,575
800 Biomet, Inc.*...................... 7,150
4,150 Bristol Myers-Squibb Co............ 233,438
600 IMCERA Group, Inc.................. 19,425
5,200 Johnson & Johnson Co............... 204,100
2,300 Lilly (Eli) & Co................... 115,000
500 Medtronic, Inc..................... 33,875
9,000 Merck & Co., Inc................... 276,750
2,600 Pfizer, Inc........................ 154,700
1,600 Schering-Plough Corp............... 105,400
500 St. Jude Medical, Inc.............. 14,562
1,700 Syntex Corp........................ 29,750
Value
Shares Description (Note 1)
- ------------------------------------------------------------
400 United States Surgical Corp........ $ 8,400
1,300 Upjohn Co.......................... 37,050
1,100 Warner Lambert Co.................. 72,738
-----------
1,803,127
-----------
Electronics--3.6%
700 Advanced Micro Devices, Inc.*...... 18,462
800 Amdahl Corp........................ 4,800
900 AMP, Inc........................... 59,513
900 Apple Computer..................... 21,038
200 Cray Research, Inc.*............... 4,800
200 Data General Corp.*................ 2,050
1,000 Digital Equipment Corp.*........... 36,750
400 EG&G, Inc.......................... 6,550
1,800 Emerson Electric Co................ 105,750
300 Harris Corp........................ 12,788
2,000 Hewlett-Packard Co................. 136,750
3,400 Intel Corp......................... 240,125
2,200 Motorola, Inc...................... 222,200
800 National Semiconductors Corp.*..... 16,400
300 Perkin Elmer Corp.................. 9,450
500 Tandy Corp......................... 18,437
200 Tektronix, Inc..................... 4,800
700 Texas Instruments, Inc............. 52,850
150 Thomas & Betts Corp................ 9,394
100 Zenith Electronics Corp.*.......... 625
-----------
983,532
-----------
Financial Services--2.9%
3,800 American Express Co................ 135,375
250 Beneficial Corp.................... 19,313
800 Block (H&R), Inc................... 30,400
1,258 Dean Witter Discover & Co.......... 55,509
1,400 Federal Home Loan Mortgage Corp.... 70,875
2,150 Federal National Mortgage Assn..... 169,313
234 First Colony Corp.................. 7,048
400 Household International Corp....... 31,150
700 MBNA Corp.......................... 23,538
See Notes to Financial Statements.
B-52
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Financial Services, cont'd.
800 Merrill Lynch & Co., Inc........... $ 78,400
1,866 Primerica Corp..................... 88,868
900 Salomon, Inc....................... 42,975
650 Transamerica Corp.................. 38,106
-----------
790,870
-----------
Food & Beverage--3.1%
2,725 Archer-Daniels-Midland Co.......... 60,972
1,100 Borden, Inc........................ 19,525
2,000 Campbell Soup Co................... 77,000
2,000 ConAgra, Inc....................... 52,000
1,200 CPC Int'l., Inc.................... 52,500
300 Fleming Cos., Inc.................. 9,938
1,350 General Mills, Inc................. 81,338
600 Gerber Products Co................. 16,125
400 Giant Foods, Inc................... 9,200
2,000 Heinz (H.J.) Co.................... 71,250
700 Hershey Foods Corp................. 34,912
1,850 Kellogg Co......................... 91,575
800 Pet, Inc........................... 13,500
600 Quaker Oats Co..................... 40,200
160 Ralston Continental Baking Group... 1,540
800 Ralston Purina Co.................. 31,200
3,800 Sara Lee Corp...................... 89,775
1,500 Sysco Corp......................... 41,250
900 Wrigley (W.M.) Junior Co........... 40,950
-----------
834,750
-----------
Forest Products--1.6%
300 Boise Cascade Corp................. 6,300
700 Champion International Corp........ 21,175
300 Federal Paper Board, Inc........... 6,188
750 Georgia Pacific Corp............... 46,688
1,000 International Paper Co............. 60,250
600 James River Corp. of Virginia...... 12,675
1,300 Kimberly Clark Corp................ 63,700
900 Louisiana Pacific Corp............. 29,475
500 Mead Corp.......................... 21,125
200 Potlatch Corp...................... 8,475
Value
Shares Description (Note 1)
- ------------------------------------------------------------
600 Scott Paper Co..................... $ 19,650
500 Stone Container Corp.,............. 3,625
400 Temple Inland, Inc................. 16,400
600 Union Camp Corp.................... 25,424
500 Westvaco Corp...................... 16,875
1,600 Weyerhaeuser Co.................... 65,200
-----------
423,225
-----------
Gas Pipeline--0.7%
400 Columbia Gas System, Inc.*......... 10,450
800 Consolidated Natural Gas Co........ 42,800
1,900 Enron Corp......................... 66,500
900 Panhandle Eastern Corp............. 22,612
300 Peoples Energy Corp................ 9,563
300 Transco Energy Co.................. 5,100
400 Williams Cos., Inc................. 25,150
-----------
182,175
-----------
Hospital Management--0.2%
500 Beverly Enterprises, Inc.*......... 5,188
300 Community Psychiatric Centers...... 3,975
400 Manor Care, Inc.................... 8,500
1,200 National Medical Enterprises,
Inc.............................. 11,550
600 Service Corp. International........ 14,925
100 Shared Medical Systems Corp........ 2,424
-----------
46,562
-----------
Household Durables
300 Armstrong World Industries......... 12,488
-----------
Insurance--3.3%
900 Aetna Life & Casualty Co........... 54,000
300 Alexander & Alexander Services..... 6,525
1,700 American General Corp.............. 55,675
2,575 American International Group,
Inc.............................. 252,672
800 Capital Holding Corp............... 34,600
750 Chubb Corp......................... 63,094
550 CIGNA Corp......................... 35,750
550 CNA Financial Corp.*............... 46,750
400 Continental Corp................... 12,350
See Notes to Financial Statements.
B-53
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Insurance, cont'd.
650 General Re Corp.................... $ 79,950
350 Jefferson-Pilot Corp............... 18,680
700 Lincoln National Corp.............. 32,725
550 Marsh & McLennan Cos............... 47,988
500 SAFECO Corp........................ 30,750
300 St. Paul Companies, Inc............ 27,338
550 Torchmark Corp..................... 31,075
1,100 Travelers Corp..................... 41,388
600 USF&G Corp......................... 8,475
200 USLIFE Corp........................ 8,475
-----------
888,260
-----------
Leisure--1.0%
300 Bally Manufacturing Co.*........... 2,888
1,600 Blockbuster Entertainment Corp..... 45,800
700 Brunswick Corp..................... 9,800
4,100 Disney (Walt) Co................... 154,774
200 Handleman Co....................... 2,250
800 Hasbro, Inc........................ 31,500
300 King World Productions, Inc.*...... 12,263
800 Mattel, Inc........................ 22,100
100 Outboard Marine Corp............... 1,850
-----------
283,225
-----------
Lodging--0.3%
400 Hilton Hotels Corp................. 19,600
800 Marriott Corp...................... 25,000
600 Promus Cos., Inc.*................. 45,300
-----------
89,900
-----------
Machinery--1.2%
100 Briggs & Stratton Corp............. 8,450
850 Caterpillar, Inc................... 67,150
200 Cincinnati Milacron, Inc........... 5,024
200 Clark Equipment Co.*............... 9,550
900 Cooper Industries, Inc............. 42,750
600 Deere & Co......................... 43,425
500 Dover Corp......................... 27,250
500 Eaton Corp......................... 25,437
Value
Shares Description (Note 1)
- ------------------------------------------------------------
200 Giddings & Lewis, Inc.............. $ 4,750
200 Harnischfeger Industries, Inc...... 3,875
800 Ingersoll Rand Co.................. 30,300
250 PACCAR Inc......................... 15,500
400 Parker Hannifin Corp............... 13,650
300 Snap-On Tools Corp................. 11,513
50 SPX Corp........................... 868
200 Timken Co.......................... 5,950
300 Varity Corp.*...................... 10,763
-----------
326,205
-----------
Media--2.5%
120 Capital Cities/ABC, Inc............ 69,240
120 CBS, Inc........................... 32,295
1,100 Comcast Corp....................... 34,168
1,300 Donnelley (R.R.) & Sons, Co........ 38,025
800 Dow Jones & Co., Inc............... 26,400
1,400 Dun & Bradstreet Corp.............. 87,500
1,150 Gannett, Inc....................... 55,056
600 Interpublic Group Cos., Inc........ 18,600
450 Knight Ridder, Inc................. 23,513
400 McGraw Hill, Inc................... 27,100
200 Meredith Corp...................... 7,275
700 New York Times Co.................. 17,412
1,000 Paramount Communications, Inc...... 78,875
3,000 Time Warner, Inc................... 122,250
1,000 Times Mirror Co.................... 28,750
500 Tribune Co......................... 26,750
-----------
693,209
-----------
Mineral Resources--0.6%
700 Amax, Inc.......................... 15,487
300 ASARCO, Inc........................ 5,063
400 Cyprus Minerals Corp............... 9,650
800 Echo Bay Mines, Ltd................ 8,100
1,000 Homestake Mining Co................ 16,750
800 Inco, Ltd.......................... 14,200
600 Newmont Mining Corp................ 28,425
600 Phelps-Dodge Corp.................. 23,850
See Notes to Financial Statements.
B-54
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Mineral Resources, cont'd.
40 Pittston Minerals Group............ $ 975
1,800 Placer Dome, Inc................... 34,425
-----------
156,925
-----------
Miscellaneous Basic Industry--4.8%
125 Bassett Furniture Industries,
Inc.............................. 4,422
1,300 Browning Ferris Industries, Inc.... 29,900
200 Crane Co........................... 5,600
40 Dovatron International, Inc.*...... 765
300 Ecolab, Inc........................ 12,675
250 FMC Corp.*......................... 12,281
6,850 General Electric Co................ 655,888
300 General Signal Corp................ 9,638
400 Grainger (W.W.), Inc............... 21,450
900 Illinois Tool Works, Inc........... 34,762
900 ITT Corp........................... 84,263
100 JWP, Inc.*......................... 113
400 Litton Industries, Inc.*........... 23,750
200 Millipore Corp..................... 6,600
200 Morrison Knudsen Corp.............. 4,975
50 NACCO Industries, Inc.............. 2,312
833 Pall Corp.......................... 16,035
850 PPG Industries, Inc................ 55,463
300 Rollins Environmental Services,
Inc.............................. 1,800
400 Teledyne, Inc...................... 11,000
700 Textron Inc........................ 40,688
200 Trinova Corp....................... 5,375
500 TRW, Inc........................... 33,624
400 Tyco Labs, Inc..................... 17,300
1,000 United Technologies Corp........... 55,500
2,700 Westinghouse Electric Corp......... 35,100
3,900 WMX Technologies, Inc.............. 118,950
100 Zurn Industries, Inc............... 3,213
-----------
1,303,442
-----------
Miscellaneous Consumer Growth--2.5%
500 Allergan, Inc...................... 11,000
600 American Greetings Corp............ 18,674
Value
Shares Description (Note 1)
- ------------------------------------------------------------
600 Black & Decker Corp................ $ 12,225
1,500 Corning, Inc....................... 50,250
400 Dial Corp.......................... 15,550
2,600 Eastman Kodak Co................... 154,050
300 Jostens, Inc....................... 5,925
1,750 Minnesota Mining & Manufacturing
Co............................... 180,030
100 National Education Corp.*.......... 650
300 Polaroid Corp...................... 10,125
300 Premark International, Inc......... 19,163
1,300 Rubbermaid, Inc.................... 43,063
1,300 Unilever N.V....................... 138,775
800 Whitman Corp....................... 12,000
-----------
671,480
-----------
Office Equipment & Supplies--1.6%
400 Alco Standard Corp................. 17,600
400 Avery Dennison Corp................ 10,500
700 Compaq Computer Corp.*............. 40,688
1,100 Honeywell, Inc..................... 39,324
4,500 International Business Machines
Corp............................. 189,000
1,300 Pitney Bowes, Inc.................. 49,725
1,200 Unisys Corp.*...................... 14,250
850 Xerox Corp......................... 62,156
-----------
423,243
-----------
Petroleum--9.4%
700 Amerada Hess Corp.................. 37,100
4,000 Amoco Corp......................... 231,000
500 Ashland Oil, Inc................... 16,938
1,250 Atlantic Richfield Co.............. 142,969
2,650 Chevron Corp....................... 259,038
9,850 Exxon Corp......................... 645,175
400 Kerr McGee Corp.................... 20,750
200 Louisiana Land & Exploration Co.... 8,924
1,000 Maxus Energy Corp.*................ 8,000
3,150 Mobil Corp......................... 257,119
2,400 Occidental Petroleum Corp.......... 49,500
300 Pennzoil Co........................ 19,050
2,100 Phillips Petroleum Co.............. 70,613
See Notes to Financial Statements.
B-55
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Petroleum, cont'd.
4,250 Royal Dutch Petroleum Co........... $ 431,905
600 Santa Fe Energy Resources, Inc..... 6,300
900 Sun Co., Inc....................... 25,650
1,300 Tenneco, Inc....................... 68,575
2,100 Texaco, Inc........................ 142,275
1,900 Unocal Corp........................ 53,438
2,300 USX Marathon Group................. 46,000
-----------
2,540,319
-----------
Petroleum Services--1.1%
1,100 Baker Hughes, Inc.................. 25,850
1,100 Dresser Industries, Inc............ 23,512
900 Halliburton Co..................... 33,413
200 Helmerich & Payne, Inc............. 6,800
400 McDermott International, Inc....... 11,300
200 Nl Industries, Inc................. 1,000
800 Oryx Energy Co..................... 19,600
600 Rowan Cos., Inc.*.................. 5,700
2,000 Schlumberger, Ltd.................. 133,250
800 Sonat, Inc......................... 28,000
-----------
288,425
-----------
Railroads--1.3%
700 Burlington Northern, Inc........... 37,537
600 Consolidated Rail Corp............. 35,100
900 CSX Corp........................... 69,863
1,100 Norfolk Southern Corp.............. 75,075
1,500 Santa Fe Pacific Corp.............. 27,375
1,600 Union Pacific Corp................. 100,000
-----------
344,950
-----------
Restaurants--0.6%
200 Luby's Cafeterias, Inc............. 4,400
2,800 McDonald's Corp.................... 145,250
400 Ryans Family Steak Houses, Inc.*... 3,425
Value
Shares Description (Note 1)
- ------------------------------------------------------------
300 Shoney's, Inc.*.................... $ 6,712
800 Wendys International, Inc.......... 11,900
-----------
171,687
-----------
Retail--6.6%
1,000 Albertsons, Inc.................... 50,375
600 American Stores Co................. 25,425
200 Brown Group, Inc................... 6,850
600 Brunos, Inc........................ 6,675
800 Charming Shoppes, Inc.............. 9,950
700 Circuit City Stores, Inc........... 19,600
600 Dayton Hudson Corp................. 41,400
1,000 Dillard Department Stores, Inc..... 36,000
1,100 Gap, Inc........................... 32,450
100 Genesco, Inc.*..................... 800
300 Great Atlantic & Pacific Tea,
Inc.............................. 7,463
600 Harcourt General, Inc.............. 26,925
3,566 Home Depot, Inc.................... 137,290
3,200 K mart Corp........................ 77,200
800 Kroger Co.*........................ 16,100
32,800 Limited, Inc....................... 63,350
600 Liz Claiborne, Inc................. 12,150
200 Longs Drug Stores Corp............. 6,425
2,000 May Department Stores Co........... 87,000
300 McKesson Corp...................... 15,188
800 Melville Corp...................... 35,200
300 Mercantile Stores, Inc............. 10,275
600 Newell Co.......................... 21,075
600 NIKE, Inc.......................... 27,000
600 Nordstrom, Inc..................... 18,300
100 Oshkosh `B` Gosh, Inc.............. 1,800
1,900 Penney (J.C.), Inc................. 89,062
400 Pep Boys - Manny, Moe & Jack....... 9,400
400 Price Co.*......................... 15,100
700 Reebok International Ltd........... 16,800
600 Rite-Aid Corp...................... 9,375
2,800 Sears Roebuck & Co................. 150,850
700 Sherwin Williams Co................ 25,200
400 Stride Rite Corp................... 5,650
600 Supervalue, Inc.................... 19,724
600 TJX Companies, Inc................. 18,075
See Notes to Financial Statements.
B-56
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Retail, cont'd.
2,300 Toys `R` Us, Inc.*................. $ 84,813
18,200 Wal-Mart Stores, Inc............... 448,175
1,000 Walgreen Co........................ 37,375
600 Winn-Dixie Stores, Inc............. 34,875
1,000 Woolworth Corp..................... 25,000
-----------
1,781,740
-----------
Rubber--0.3%
600 Cooper Tire & Rubber............... 15,075
200 Goodrich (B.F.) Co................. 8,800
1,200 Goodyear Tire & Rubber Co.......... 52,350
-----------
76,225
-----------
Steel--0.3%
800 Armco, Inc......................... 5,000
700 Bethlehem Steel Corp.*............. 10,063
300 Inland Steel Industries, Inc.*..... 8,438
50 National Intergroup, Inc........... 680
700 Nucor Corp......................... 37,888
500 USX Corp.--U.S. Steel Group........ 16,000
500 Worthington Industries, Inc........ 14,313
-----------
92,382
-----------
Telecommunications--4.7%
10,700 American Telephone & Telegraph
Co............................... 629,962
2,200 Ameritech Corp..................... 188,375
100 Andrew Corp.*...................... 3,875
400 DSC Communications Corp.*.......... 24,475
100 M/A-Com, Inc.*..................... 888
1,700 McCaw Cellular Communications,
Inc.*............................ 91,163
4,100 MCI Communications Corp............ 112,750
1,900 Northern Telecom Ltd............... 46,312
250 Scientific Atlanta, Inc............ 8,625
2,700 Sprint Corp........................ 98,888
3,400 Tele-Communications, Inc.*......... 85,213
-----------
1,290,526
-----------
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Textiles--0.2%
400 National Service Industries,
Inc.............................. $ 10,000
300 Russell Corp....................... 8,400
200 Springs Industries, Inc............ 7,050
500 VF Corp............................ 22,063
-----------
47,513
-----------
Tobacco--1.6%
1,600 American Brands, Inc............... 52,000
7,050 Philip Morris Cos., Inc............ 323,419
1,700 UST, Inc........................... 45,687
-----------
421,106
-----------
Trucking/Shipping--0.3%
300 Consolidated Freightways, Inc.*.... 4,763
400 Federal Express Corp.*............. 24,750
300 Pittston Services Group............ 6,488
300 Roadway Services, Inc.............. 17,888
600 Ryder System, Inc.................. 18,225
200 Yellow Corp........................ 4,888
-----------
77,002
-----------
Utility--Communications--5.7%
3,500 Bell Atlantic Corp................. 223,124
3,900 BellSouth Corp..................... 235,950
7,400 GTE Corp........................... 283,975
3,400 NYNEX Corp.,....................... 155,975
3,200 Pacific Telesis Group.............. 173,200
4,800 Southwestern Bell Corp............. 207,000
1,800 Texas Utilities Co................. 82,574
3,300 U.S. West, Inc..................... 162,524
800 Union Electric Co.................. 35,300
-----------
1,559,622
-----------
Utility--Electric--4.5%
1,500 American Electric Power, Inc....... 57,750
1,100 Baltimore Gas & Electric........... 29,150
1,300 Carolina Power & Light Co.......... 42,575
1,500 Central & South West Corp.......... 49,312
See Notes to Financial Statements.
B-57
<PAGE>
THE PRUDENTIAL
STOCK INDEX FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Utility--Electric, cont'd.
1,700 Commonwealth Edison Co............. $ 51,638
1,900 Consolidated Edison Co............. 68,638
1,200 Detroit Edison Co.................. 41,250
1,300 Dominion Resources, Inc............ 62,888
1,600 Duke Power Co...................... 69,400
1,400 Entergy Corp....................... 54,250
1,500 FPL Group, Inc..................... 59,062
1,000 Houston Industries, Inc............ 46,625
1,100 Niagara Mohawk Power Corp.......... 26,263
500 Northern States Power Co........... 23,188
1,200 Ohio Edison Co..................... 30,300
600 Pacific Enterprises................ 15,900
3,400 Pacific Gas & Electric Co.......... 120,274
2,100 Pacificorp......................... 41,213
1,700 Philadelphia Electric Co.,......... 55,888
400 PSI Resources, Inc................. 10,400
1,900 Public Service Enterprise Group.... 66,738
3,500 SCE Corp........................... 81,812
2,500 Southern Co........................ 112,500
-----------
1,217,014
-----------
Total common stocks
(cost $24,097,582)............... 25,521,792
-----------
Warrants
40 Therapeutic Discovery Corp.
Expires 12/31/99 (cost $230)..... 202
-----------
Total long-term investments
(cost $24,097,812)............... 25,521,994
-----------
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--5.9%
U. S. Government Securities--0.2%
$ 60 + United States Treasury Bills
2.95%, 12/16/93
(cost $59,626).................. $ 59,626
-----------
Repurchase Agreement--5.7%
Joint Repurchase Agreement Account
1,539 3.30%, 10/01/93, (Note 5)
(cost $1,539,000)............... 1,539,000
-----------
Total short-term investments
(cost $1,598,626)............... 1,598,626
-----------
Total Investments--99.9%
(cost $25,696,438; Note 4)...... 27,120,620
Other assets in excess of
liabilities--0.1%............... 21,707
-----------
Net Assets--100%.................. $27,142,327
===========
--------
* Non-income producing security.
+ Pledged as initial margin on futures contracts.
See Notes to Financial Statements.
B-58
<PAGE>
THE PRUDENTIAL
INTERNATIONAL STOCK FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
Value
Shares Description (Note 1)
- -------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--92.7%
Australia--6.0%
240,000 CSR Ltd. ......................... $ 676,213
(Misc. Basic Industry)
80,000 National Australia Bank Ltd. ..... 623,086
(Banks & Financial Services)
360,000 Pioneer International Ltd. ....... 617,412
(Natural Resources) -----------
1,916,711
-----------
Belgium--1.8%
6,000 Groupe Bruxelles Lambert S.A. .... 567,965
(Banks & Financial Services) -----------
Canada--3.8%
31,000 Bank of Nova Scotia Halifax ...... 635,317
(Banks & Financial Services)
36,000 MacMillan Bloedel Ltd. ........... 562,605
(Misc. Basic Industry) -----------
1,197,922
-----------
France--11.4%
5,500 Bon Marche ....................... 617,436
(Misc. Consumer Growth)
3,100 Chargeurs Reunis S.A. ............ 633,485
(Misc. Basic Industry)
6,600 Gan .............................. 597,369
(Insurance)
3,700 Lafarge Coppee S.A. .............. 266,159
(Natural Resources)
10,000 Michelin ......................... 320,996
(Consumer Durable Goods)
Value
Shares Description (Note 1)
- ------------------------------------------------------------
5,400 Peugeot S.A. ..................... $ 621,365
(Automobiles)
7,500 Societe Nationale Elf Aquitaine ... 555,955
(Petroleum) -----------
3,612,765
-----------
Ireland--0.9%
70,000 Allied Irish Banks PLC ........... 279,602
(Banks & Financial Services) -----------
Italy--2.3%
115,000 Avir Finanziaria S.P.A. .......... 398,021
(Natural Resources)
290,000 Pirelli, S.P.A.* ................. 310,584
(Natural Resources) -----------
708,605
-----------
Korea--5.2%
33,000 Hyundai Motor Co. ................ 668,250
(Automobiles)
16,850 Korea First Bank ................. 220,479
(Banks & Financial Services)
4,300 Korea Long Term Credit Bank ...... 93,421
(Banks & Financial Services)
9,000 Lucky Development Co. ............ 184,422
(Construction)
4,500 Pohang Iron & Steel Co., Ltd. .... 143,316
(Steel)
7,000 Tongyang Cement .................. 173,682
(Capital Goods)
9,000 Woosung Construction ............. 164,424
(Construction) -----------
1,647,994
-----------
See Notes to Financial Statements.
B-59
<PAGE>
THE PRUDENTIAL
INTERNATIONAL STOCK FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Mexico--7.3%
17,000 Empresas ICA Sociedad Controladura,
S.A.............................. $ 293,235
(Construction)
300,000 Grupo Financiero Bancomer ........ 452,068
(Foods)
195,000 Grupo Industrial Maseca .......... 205,691
(Housing Related)
306,263 Grupo Situr S.A. ................. 498,819
(Misc. Consumer Growth)
79,000 Industrias Penoles, S.A. de C.V. .. 149,439
(Aluminum)
75,000 Tubos de Acero de Mexico, S.A.* ... 351,074
(Gas Pipelines)
66,000 Vitro, S.A. ...................... 379,833
(Misc. Basic Industry) -----------
2,330,159
-----------
Netherlands--11.2%
12,000 DSM N.V.* ........................ 628,618
(Chemicals)
12,000 Gamma Holdings N.V. .............. 578,904
(Textiles)
15,000 Internationale Nederlanden Bank
N.V. ............................ 607,522
(Insurance)
33,000 Knp Bt (kon) N.V.* ............... 606,214
(Paper & Forest Products)
24,000 Pakhoed Holdings N.V. ............ 553,393
(Gas Pipelines)
30,000 Stork N.V. ....................... 575,634
(Machinery) -----------
3,550,285
-----------
Value
Shares Description (Note 1)
- ------------------------------------------------------------
New Zealand--3.9%
330,000 Fletcher Challenge Industries Ltd. $ 612,154
(Paper & Forest Products)
360,000 Lion Nathan Ltd. ................. 630,153
(Food & Beverage) -----------
1,242,307
-----------
Norway--7.3%
53,000 Aker A.S. ........................ 578,611
(Industrials)
34,000 Hafslund Nycomed A.S. ............ 623,399
(Consumer Goods)
20,000 Orkla A.S. ....................... 635,436
(Housing Related)
40,000 Unitor A.S. ...................... 487,074
(Food & Beverage) -----------
2,324,520
-----------
Spain--5.9%
24,000 Banco Bilbao Vizcaya ............. 623,672
(Banks & Financial Services)
5,300 Banco de Andalucia ............... 603,991
(Banks & Financial Services)
7,000 Cristale Espanola ................ 249,621
(Misc. Basic Industry)
23,614 Prosegur Compania ................ 393,268
(Consumer Services) -----------
1,870,552
-----------
</TABLE>
See Notes to Financial Statements.
B-60
<PAGE>
THE PRUDENTIAL
INTERNATIONAL STOCK FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Sweden--4.2%
20,000 Electrolux AB .................... $ 596,588
(Housing Related)
13,000 Marieberg Tidnings ............... 145,819
(Media)
11,000 Volvo AB ......................... 584,385
(Automobiles) -----------
1,326,792
-----------
Switzerland--10.8%
1,700 Alusuisse-Lonza Holdings Ltd. .... 639,734
(Aluminum)
1,300 Ciba-Geigy Ltd. .................. 617,659
(Misc. Basic Industry)
3,000 Merkur Holding AG ................ 609,671
(Merchandising)
1,000 Schweizerischer Bankverein AG .... 330,063
(Banks & Financial Services)
400 Sulzer Brothers Ltd. ............. 897
(Machinery)
1,200 Sulzer Gebruder AG ............... 613,875
(Machinery)
700 Zurich Versicherungs ............. 607,288
(Insurance) -----------
3,419,187
-----------
United Kingdom--10.7%
700,000 Babcock International Group ...... 350,811
(Capital Goods)
70,000 British Aerospace PLC ............ 436,682
(Aerospace/Defense)
Value
Shares Description (Note 1)
- ------------------------------------------------------------
215,000 Ladbroke Group PLC ............... $ 597,960
(Leisure & Tourism)
84,000 Lucas Industries PLC ............. 187,239
(Misc. Basic Industry)
80,000 National Westminster Bank PLC .... 609,170
(Banks & Financial Services)
54,000 Rank Organisation PLC ............ 657,581
(Leisure & Tourism)
70,000 Whitbread PLC .................... 549,780
(Food & Beverage) -----------
3,389,223
-----------
Total common stocks
(cost $27,097,904)................. 29,384,589
Principal
Amount
(000) SHORT-TERM INVESTMENT
- --------
Repurchase Agreement--8.3%
$ 2,646 Joint Repurchase Agreement Account
3.30%, 10/01/93, (Note 5)
(cost $2,646,000)................ 2,646,000
-----------
Total Investments--101.0%
(cost $29,743,904; Note 4)......... 32,030,589
Liabilities in excess of other
assets--(1.0%)................... (323,002)
-----------
Net Assets--100%................... $31,707,587
===========
<FN>
- ---------------
* Non income producing security.
</FN>
</TABLE>
See Notes to Financial Statements.
B-61
<PAGE>
THE PRUDENTIAL
ACTIVE BALANCED FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--50.3%
Common Stocks--29.8%
Airlines--0.8%
1,500 UAL Corp........................... $ 205,875
9,600 USAir Group, Inc................... 121,200
-----------
327,075
-----------
Automobiles & Trucks--1.2%
11,200 General Motors Corp................ 467,600
-----------
Banking--2.8%
4,800 Boatmen's Bancshares............... 309,300
8,000 Fleet Financial Group, Inc......... 279,000
22,600 Hibernia Corp...................... 189,275
4,100 Morgan (J.P.) & Co., Inc........... 321,338
-----------
1,098,913
-----------
Chemicals--0.4%
6,900 Dexter Corp........................ 158,700
-----------
Chemical--Specialty--0.5%
2,000 Morton International, Inc.......... 175,250
-----------
Computer Services--0.9%
2,000 Computer Sciences Corp............. 183,500
1,400 CUC International, Inc.*........... 50,050
8,600 Symbol Technologies, Inc.*......... 116,100
-----------
349,650
-----------
Construction--0.2%
2,900 Masco Corp......................... 92,075
-----------
Diversified Gas--0.9%
11,900 Coastal Corp....................... 325,762
-----------
Drugs & Medical Supplies--1.4%
4,100 Biogen, Inc.*...................... 151,187
1,400 Pfizer, Inc........................ 83,300
</TABLE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
1,800 Schering-Plough Corp............... $ 118,575
18,000 Wellcome Plc (ADR)................. 184,500
-----------
537,562
-----------
Electronics--1.7%
3,500 Hewlett-Packard Co................. 239,312
3,600 Intel Corp......................... 254,250
11,900 International Rectifier Corp....... 129,412
500 Texas Instruments, Inc............. 37,750
-----------
660,724
-----------
Financial Services--0.9%
7,800 Dreyfus Corp....................... 338,325
-----------
Food & Beverage--0.4%
10,000 Pet, Inc........................... 168,750
-----------
Insurance--4.4%
5,200 Ace Ltd............................ 172,250
2,700 Aetna Life & Casualty Co........... 162,000
1,800 Chubb Corp......................... 151,425
7,400 CIGNA Corp......................... 481,000
2,500 Exel Ltd........................... 115,313
12,600 Life Re Corp....................... 318,150
4,800 Reinsurance Group America, Inc..... 165,000
1,700 SAFECO Corp........................ 104,550
500 UNUM Corp.......................... 27,250
-----------
1,696,938
-----------
Leisure--0.4%
3,600 Hasbro, Inc........................ 141,750
-----------
Lodging--0.8%
6,100 Hilton Hotels Corp................. 298,900
-----------
Media--2.3%
10,900 Dow Jones & Co., Inc............... 359,700
11,400 New York Times Co.................. 283,575
</TABLE>
See Notes to Financial Statements.
B-62
<PAGE>
THE PRUDENTIAL
ACTIVE BALANCED FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media, cont'd.
3,100 Omnicom Group...................... $ 138,338
2,100 Tribune Co......................... 112,350
-----------
893,963
-----------
Miscellaneous Basic Industry--2.8%
7,500 Antec Corp......................... 178,125
4,400 Blanch E W Hldgs, Inc.............. 99,550
2,900 Eastman Kodak Co................... 171,825
5,900 Litton Industries, Inc............. 350,312
3,500 Newmont Gold Co.................... 142,188
2,800 United Technologies Corp........... 155,400
-----------
1,097,400
-----------
Petroleum Services--1.3%
8,100 Baker Hughes, Inc.................. 190,350
7,000 Petroleum Geo Services A/S (ADR)... 158,375
6,800 YPF Sociedad Anonima (ADR)*........ 172,550
-----------
521,275
-----------
Railroads--0.6%
1,100 Burlington Northern, Inc........... 58,987
2,800 Union Pacific Corp................. 175,000
-----------
233,987
-----------
Retail--2.2%
Federated Department Stores,
7,500 Inc.*............................ 145,312
12,300 K mart Corp........................ 296,738
6,600 Limited, Inc....................... 149,325
4,900 TJX Companies, Inc................. 147,613
3,700 Warnaco Group, Inc.*............... 115,625
-----------
854,613
-----------
Telecommunications--2.3%
7,000 BCE, Inc........................... 233,625
3,700 MCI Communications Corp............ 101,750
8,800 Tele-Communications, Inc.*......... 220,550
3,800 Telefonos de Mexico S.A. (ADR)..... 191,900
</TABLE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
1,700 Vodafone Group Plc (ADR)........... 129,838
-----------
877,663
-----------
Trucking/Shipping--0.6%
7,900 Ryder System, Inc.................. $ 239,963
-----------
Total common stocks
(cost $11,070,984)............... 11,556,838
-----------
Principal
Amount Debt Obligations--20.5%
(000) Convertible Bonds--0.5%
- --------
$ 218 Conner Peripherals, Inc.,
6.50%, 3/01/02
(cost $196,865).................. 184,755
-----------
U. S. Government Securities--20.0%
2,490 United States Treasury Bonds,
7.50%, 11/15/16.................. 2,859,217
United States Treasury Notes,
2,165 8.875%, 11/15/98................... 2,561,801
2,030 7.50%, 11/15/01.................... 2,325,609
-----------
Total U. S. government securities
(cost $7,520,365)................ 7,746,627
-----------
Total debt obligations
(cost $7,717,230)................ 7,931,382
-----------
Total long-term investments
(cost $18,788,214)............... 19,488,220
-----------
SHORT-TERM INVESTMENT
Repurchase Agreement--23.5%
Joint Repurchase Agreement Account
9,135 3.30%, 10/01/93, (Note 5)
(cost $9,135,000)................ 9,135,000
-----------
Total Investments--73.8%
(cost $27,923,214; Note 4)......... 28,623,220
Other assets in excess of
liabilities--26.2%............... 10,162,309
-----------
Net Assets--100%................... $38,785,529
===========
<FN>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
</FN>
</TABLE>
See Notes to Financial Statements.
B-63
<PAGE>
THE PRUDENTIAL
BALANCED FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--89.3%
Common Stocks--47.6%
Aerospace/Defense--1.1%
1,600 General Dynamics Corp.............. $ 147,400
1,700 Martin Marietta Corp............... 151,300
-----------
298,700
-----------
Automobiles & Trucks--2.0%
800 Donaldson Co. Inc.................. 31,200
1,800 Durakon Industries, Inc.*.......... 24,300
2,800 Ford Motor Co...................... 154,700
5,600 Goodyear Tire & Rubber Co.......... 244,300
2,300 Snap-On Tools Corp................. 88,263
-----------
542,763
-----------
Beverages--0.3%
2,000 PepsiCo, Inc....................... 78,250
-----------
Chemicals--0.9%
2,900 Air Products & Chemicals, Inc...... 112,375
1,600 Imperial Chemical Ind. (ADR)....... 69,400
4,500 Praxair, Inc....................... 69,750
-----------
251,525
-----------
Commercial Services--0.5%
1,625 ADVO, Inc.......................... 25,796
400 DeVRY, Inc.*....................... 11,400
4,000 ServiceMaster L.P.................. 100,000
-----------
137,196
-----------
Computer Software & Services--0.8%
3,500 Automatic Data Processing, Inc..... 175,875
2,100 Fiserv, Inc.*...................... 44,100
-----------
219,975
-----------
</TABLE>
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Containers & Packaging--0.1%
1,100 IMCO Recycling Inc.*............... $ 14,163
-----------
Cosmetics & Soaps--0.1%
International Flavors & Fragrances,
200 Inc.............................. 20,325
-----------
Diversified Gas--0.3%
2,800 Coastal Corp....................... 76,650
-----------
Drugs & Medical Supplies--1.1%
2,500 Schering-Plough Corp............... 164,688
2,000 Warner Lambert Co.................. 132,250
-----------
296,938
-----------
Electronics--2.3%
2,900 Ametek, Inc........................ 39,512
2,500 Baldor Electric Co................. 61,250
4,000 Emerson Electric Co................ 235,000
900 Lindsay Manufacturing Co.*......... 29,363
2,300 Motorola, Inc...................... 232,300
1,800 Thermotrex Corp.*.................. 42,300
-----------
639,725
-----------
Exploration & Production--1.4%
2,810 Burlington Resources, Inc.......... 142,607
2,700 Consolidated Rail Corp............. 157,950
1,600 Illinois Central Corp.............. 51,200
1,900 Southern Pacific Rail Corp.*....... 30,163
-----------
381,920
-----------
</TABLE>
See Notes to Financial Statements.
B-64
<PAGE>
THE PRUDENTIAL
BALANCED FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services--5.6%
7,800 American Express Co................ $ 277,875
4,400 Dean Witter Discover & Co.......... 194,150
3,300 Equitable Companies, Inc........... 127,050
300 Federal National Mortgage Assn..... 23,625
4,900 First Data Corp.................... 191,713
3,420 First Financial Mgmt. Corp......... 187,245
1,100 John Nuveen Co..................... 39,050
Kansas City Southern Industries,
3,100 Inc.............................. 130,587
4,200 Mid Ocean Ltd.*.................... 143,325
2,000 Penncorp Financial Group, Inc...... 42,000
Price, (T Rowe) & Associates,
600 Inc.............................. 36,675
1,100 SPS Transaction Services, Inc.*.... 63,800
1,500 State Street Boston Corp........... 53,250
800 United Asset Management Corp....... 36,200
-----------
1,546,545
-----------
Food & Beverage--0.2%
1,500 Sbarro, Inc........................ 65,813
-----------
Forest Products--0.8%
5,700 Willamette Industries, Inc......... 218,025
-----------
Gas Pipelines--0.3%
3,000 Seagull Energy Corp.*.............. 91,875
-----------
General Business--0.9%
5,000 Agency Rent-A-Car, Inc.*........... 51,250
1,200 LDDS Communications, Inc.*......... 59,850
2,100 LEGENT Corp.*...................... 45,412
1,600 Viacom, Inc.*...................... 88,400
-----------
244,912
-----------
</TABLE>
<TABLE>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Hospital Management--0.8%
2,092 Columbia Healthcare Corp.*......... $ 61,190
1,700 HBO & Co........................... 62,900
4,000 HCA-Hospital Corp. America*........ 90,000
-----------
214,090
-----------
Housing Related--1.7%
1,400 Clayton Homes, Inc.*............... 37,975
1,700 Federal Realty Investment Trust.... 50,788
1,700 Manufactured Home Community, Inc... 75,863
3,500 Property Trust America............. 73,937
2,300 TJ International Incorporated...... 108,675
United Dominion Reality Trust,
3,600 Inc.............................. 58,950
1,600 Weingarten Realty Investors........ 70,000
-----------
476,188
-----------
Insurance--3.2%
2,900 American General Corp.............. 94,975
2,000 Capital Holding Corp............... 86,500
1,600 CCP Insurance, Inc................. 50,000
1,500 Chubb Corp......................... 126,188
1,380 General Re Corp.................... 169,740
1,600 Horace Mann Educators Corp......... 42,200
2,500 Liberty Media Corp................. 61,875
1,900 SAFECO Corp........................ 116,850
2,000 Travelers Corp..................... 75,250
957 UNUM Corp.......................... 52,156
-----------
875,734
-----------
Leisure--1.3%
5,100 Carnival Cruise Lines, Inc......... 224,400
4,400 Cedar Fair, L.P.................... 144,650
-----------
369,050
-----------
</TABLE>
See Notes to Financial Statements.
B-65
<PAGE>
THE PRUDENTIAL
BALANCED FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Machinery--0.3%
2,500 Gorman-Rupp Co..................... $ 69,218
2,000 Lawter International, Inc.......... 26,500
-----------
95,718
-----------
Media--2.7%
3,700 American Business Information*..... 48,100
400 Capital Cities/ABC, Inc............ 230,800
3,300 Placer Dome, Inc................... 63,112
2,000 Scholastic Corp.*.................. 96,000
2,000 TCA Cable TV, Inc.................. 51,625
6,300 Time Warner, Inc................... 256,725
-----------
746,362
-----------
Miscellaneous Basic Industry--4.0%
3,200 Caremark International, Inc.*...... 50,400
1,500 Duke Reality Investments, Inc...... 37,125
1,650 Fuller, H.B. Co.................... 55,068
2,450 General Electric Co................ 234,588
4,400 Illinois Tool Works, Inc........... 169,950
2,000 ITT Corp........................... 187,250
1,200 Nautica Enterprises, Inc.*......... 33,150
575 Olsten Corp........................ 15,813
700 Textron Inc........................ 40,688
2,000 Thermo Electron Corp.*............. 127,000
400 Thermo Fibertek, Inc.*............. 6,000
2,450 Thermo Instrument System, Inc.*.... 69,213
2,000 Tuscarora, Inc..................... 25,750
1,300 Valspar Corp....................... 49,888
-----------
1,101,883
-----------
Miscellaneous Consumer Growth--0.7%
3,200 Eastman Kodak Co................... 189,600
-----------
Petroleum--4.0%
2,800 Amoco Corp......................... 161,700
7,300 Cross Timbers Oil Co............... 126,838
</TABLE>
<TABLE>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
4,300 Exxon Corp......................... $ 281,650
1,100 Kaydon Corp........................ 21,862
2,800 Royal Dutch Petroleum Co........... 284,550
2,700 Schlumberger, Ltd.................. 179,888
Union Texas Petroleum Holdings,
2,000 Inc.............................. 52,750
-----------
1,109,238
-----------
Regional Banks--2.7%
2,937 Banc One Corp...................... 121,885
6,400 Norwest Corp....................... 176,800
2,800 Republic New York Corp............. 147,700
1,500 Summit Bancorporation.............. 34,125
4,400 Union Planters Corp................ 127,600
1,500 Wachovia Corp...................... 58,688
Washington Mutual Savings of
3,600 Seattle.......................... 97,200
-----------
763,998
-----------
Retail--0.8%
1,600 Edison Brothers Stores, Inc........ 42,800
1,700 Kellwood Co........................ 63,325
3,600 Newell Co.......................... 126,450
-----------
232,575
-----------
Steel--0.4%
3,800 Worthington Industries, Inc........ 108,775
-----------
Technology--0.5%
1,500 Anthem Electronics Inc.*........... 52,312
1,500 General Instrument Corp.*.......... 78,563
-----------
130,875
-----------
</TABLE>
See Notes to Financial Statements.
B-66
<PAGE>
THE PRUDENTIAL
BALANCED FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Telecommunications--4.5%
2,100 ALLTEL Corp........................ $ 64,575
American Telephone & Telegraph
4,900 Co............................... 288,487
Ericsson (L.M.) Telephone Co.,
2,900 (ADR)............................ 155,875
9,700 MCI Communications Corp............ 266,750
1,200 Mobile Telecommunication Technology
Corp.*........................... 41,175
300 Nordson Corp....................... 15,675
7,900 Tele-Communications, Inc.*......... 197,993
3,000 Telefonos de Mexico S.A. (ADR)..... 151,500
1,200 Telephone & Data System, Inc....... 63,300
-----------
1,245,330
-----------
Trucking/Shipping--0.1%
700 Expeditores International, Inc..... 19,688
-----------
Utilities--1.2%
2,400 Entergy Corp....................... 93,000
1,300 Rochester Telephone Corp........... 62,725
4,400 Southwestern Bell Corp............. 189,750
-----------
345,475
-----------
Total common stocks
(cost $11,702,949)................. 13,149,879
-----------
<CAPTION>
Principal
Amount U. S. Government
(000) Securities--41.7%
- --------
<C> <S> <C>
United States Treasury Bond,
$ 1,750 11.25%, 2/15/15.................... 2,791,530
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
United States Treasury Notes,
$ 1,000 7.25%, 11/15/96................... $ 1,085,160
1,500 9.00%, 5/15/98.................... 1,765,305
1,500 6.375%, 1/15/99................... 1,606,170
4,000 6.375%, 1/15/00................... 4,290,000
-----------
Total U. S. government securities
(cost $11,138,061)................ 11,538,165
-----------
Total long-term investments
(cost $22,841,010)................ 24,688,044
SHORT-TERM INVESTMENT
Repurchase Agreement--10.1%
Joint Repurchase Agreement Account
2,802 3.30%, 10/01/93, (Note 5)
(cost $2,802,000)................. 2,802,000
-----------
Total Investments--99.4%
(cost $25,643,010; Note 4)........ 27,490,044
Other assets in excess of
liabilities--0.6%............... 172,541
-----------
Net Assets--100%.................. $27,662,585
===========
--------
* Non income producing security.
ADR--American Depository Receipt.
</TABLE>
See Notes to Financial Statements.
B-67
<PAGE>
THE PRUDENTIAL
INCOME FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--93.3%
Corporate Bonds--18.3%
Ashland Oil Inc., 9.85%,
$ 400 9/15/95......................... $ 438,512
Eastman Kodak Co., 9.875%,
500 11/01/04........................ 590,805
General Motors Acceptance Corp.,
475 8.15%, 9/17/96.................. 514,359
GGIA Funding Corp., 11.50%,
400 1/15/14......................... 442,000
500 Hanson Overseas, 5.50%, 1/15/96... 509,630
Household Finance Corp., 7.80%,
1,000 11/01/96........................ 1,079,560
IC Industries Financial Corp.,
705 8.00%, 7/01/96.................. 758,977
500 Lockheed Corp., 4.875%, 2/15/96... 501,410
Occidental Petroleum Corp.,
250 11.75%, 3/15/11................. 298,008
Philip Morris Cos., Inc., 8.75%,
500 6/15/97......................... 555,670
Tenneco Credit Corp., 10.125%,
400 12/01/97........................ 461,060
Union Bank Finland, 5.25%,
250 6/15/96......................... 251,120
-----------
Total corporate bonds
(cost $6,341,044)................. 6,401,111
-----------
Foreign Government Obligations--1.7%
New Zealand Government Bond,
10.50%, 7/16/00
500 (cost $586,616)................. 595,625
-----------
U.S. Government And Agency
Securities--73.3%
Federal Home Loan Mortgage Corp.,
986 7.00%, 1/01/99.................... 1,022,075
Federal National Mortgage Assn.,
2,970 7.00%, 9/01/23 - 9/25/23.......... 3,042,379
Government National Mortgage
Assn.,
3,000 6.50%, 6/15/23.................... 3,030,000
2,959 7.00%, 5/15/23 - 7/15/23.......... 3,048,995
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
$ 4,000 9.00%, 6/15/23.................... $ 4,276,250
United States Treasury Bonds,
2,000 10.375%, 11/15/09................. 2,763,740
United States Treasury Notes,
500 4.25%, 7/31/95.................... 503,750
2,500 5.75%, 10/31/97................... 2,607,800
500 5.125%, 4/30/98................... 508,750
2,000 5.25%, 7/31/98.................... 2,042,180
United States Treasury Strips,
2,000 Zero coupon, 2/15/08.............. 820,660
2,500 Zero coupon, 8/15/08.............. 987,375
1,000 Zero coupon, 5/15/11.............. 317,220
1,500 Zero coupon, 8/15/11.............. 467,955
500 Zero coupon, 8/15/13.............. 134,185
500 Zero coupon, 5/15/18.............. 97,286
-----------
Total U. S. government and agency
securities
(cost $25,054,371)................ 25,670,600
-----------
Total long-term investments
(cost $31,982,031)................ 32,667,336
-----------
SHORT-TERM INVESTMENTS--3.9%
Corporate Bonds--1.5%
508,200
500 Dow Corning Corp.,
7.61%, 3/01/94
(cost $504,546).................
-----------
Repurchase Agreement--2.4%
Joint Repurchase Agreement
Account,
848 3.30%, 10/01/93, (Note 5)
(cost $848,000)................. 848,000
-----------
Total short-term investments
(cost $1,352,546)................. 1,356,200
-----------
Total Investments--97.2%
(cost $33,334,577; Note 4)........ 34,023,536
Other assets in excess of
liabilities--2.8%............... 991,451
-----------
Net Assets--100%.................. $35,014,987
===========
</TABLE>
See Notes to Financial Statements.
B-68
<PAGE>
THE PRUDENTIAL
MONEY MARKET FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Bank Notes--4.0%
NationsBank North Carolina
$ 200 3.65%, 6/07/94.................... $ 200,167
1,000 3.65%, 6/21/94.................... 999,507
-----------
Total bank notes (amortized cost
$1,199,674)..................... 1,199,674
-----------
Certificates of Deposit--Eurodollar--3.3%
Fuji Bank, Ltd.
1,000 3.19%, 10/01/93
(amortized cost $1,000,000)....... 1,000,000
-----------
Commercial Paper--
Domestic--58.7%
Allied Signal, Inc.
930 3.20%, 10/04/93................... 929,752
American Express Credit Corp.
1,000 3.15%, 10/12/93................... 999,038
Aristar, Inc.
500 3.21%, 10/27/93................... 498,841
Associates Corp. of North America
1,000 3.20%, 1/11/94.................... 990,933
Cheltenham & Glouster Building
844 3.12%, 12/22/93................... 838,002
Ciesco, Inc.
1,000 3.10%, 10/04/93................... 999,742
Corporate Asset Funding Co., Inc.
787 3.10%, 11/18/93................... 783,747
Ford Motor Credit Corp.
1,000 3.12%, 11/18/93................... 995,840
General Electric Capital Corp.
1,000 3.09%, 11/09/93................... 996,653
Golden Peanut Co.
400 3.12%, 11/01/93................... 398,925
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Household Finance Corp.
$ 1,000 3.15%, 11/01/93................... $ 997,288
International Lease Finance
1,000 3.20%, 1/20/94.................... 990,133
K mart Corp.
200 3.17%, 10/27/93................... 199,542
Merrill Lynch & Co., Inc.
257 3.12%, 10/04/93................... 256,933
Michelin Tire Corp.
1,000 3.11%, 11/19/93................... 995,767
Mitsubishi International Corp.
250 3.15%, 10/06/93................... 249,891
200 3.20%, 11/08/93................... 199,324
Morgan Stanley Group, Inc.
1,198 3.15%, 11/15/93................... 1,193,283
Orix USA Corporation
500 3.14%, 10/08/93................... 499,695
Pitney Bowes Credit Corp.
500 3.125%, 10/18/93.................. 499,262
Preferred Receivables Funding
Corp.
240 3.12%, 10/06/93................... 239,896
672 3.15%, 11/16/93................... 669,295
Rite Aid Corp.
975 3.14%, 10/20/93................... 973,384
Sumitomo Corp. of America
235 3.275%, 11/17/93.................. 233,995
Toronto Dominion Hldgs.
1,145 3.25%, 4/11/94.................... 1,125,153
-----------
Total commercial paper--domestic
(amortized cost $17,754,314).... 17,754,314
-----------
Corporate Bonds--1.6%
Associates Corp. of North America
200 8.85%, 10/01/93................... 200,000
</TABLE>
See Notes to Financial Statements.
B-69
<PAGE>
THE PRUDENTIAL
MONEY MARKET FUND
INSTITUTIONAL
PORTFOLIO OF INVESTMENTS
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Corporate Bonds, cont'd.
Norwest Financial, Inc.
$ 250 7.95%, 6/15/94.................... $ 257,576
-----------
Total corporate bonds
(amortized cost $457,576)....... 457,576
-----------
Medium Term Obligations--3.3%
Norwest Financial, Inc.
1,000 8.60%, 12/14/93................... 1,009,200
-----------
Variable Rate
Instruments*--14.2%
Capital Auto Receivable Asset
Trust
297 3.35%, 6/15/94.................... 296,844
Federal Home Loan Mortgage Corp.
1,000 2.99%, 9/13/94.................... 999,949
Goldman, Sachs & Co.
1,000 3.6875%, 7/22/94.................. 1,000,000
Lehman, Inc.
1,000 3.52%, 11/29/93................... 1,000,000
Merrill Lynch & Co., Inc.
1,000 3.3008%, 10/20/93................. 999,858
-----------
Total variable rate instruments
(amortized cost $4,296,651)..... 4,296,651
-----------
Total Investments--85.1%
(amortized cost $25,717,415**).... 25,717,415
Other assets in excess of
liabilities--14.9%.............. 4,517,549
-----------
Net Assets--100%.................. $30,234,964
===========
<FN>
--------
* For purposes of amortized cost valuation, the maturity
date of these instruments is considered to be the next
date on which the security can be redeemed at par or the
next date on which the rate of interest is adjusted.
** The cost of securities for federal income tax purposes
is substantially the same as for financial reporting
purposes.
</FN>
</TABLE>
The industry classification of portfolio holdings and other net assets shown
as a percentage of net assets as of September 30, 1993 was as follows:
<TABLE>
<S> <C>
Commercial Banks................................... 18.7%
Personal Credit Institutions....................... 16.4
Security Brokers & Dealers......................... 14.7
Asset Backed....................................... 9.9
Business Credit (Finance).......................... 6.6
Equipment Rental & Leasing......................... 3.3
Federal Credit Agencies............................ 3.3
Drug & Proprietary Stores.......................... 3.2
Aircraft & Parts................................... 3.1
Commodity Trading Firms............................ 2.3
Finance Leasers.................................... 1.7
Food & Kindred Products............................ 1.3
Variety Stores..................................... .6
-----
85.1
Other assets in excess of liabilities.............. 14.9
-----
100.0%
=====
</TABLE>
See Notes to Financial Statements.
B-70
<PAGE>
THE PRUDENTIAL
STATEMENT OF ASSETS
INSTITUTIONAL
AND LIABILITIES
FUND
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
----------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments, at value
(cost $27,004,981,
$25,696,438,
$29,743,904,
$27,923,214,
$25,643,010, $33,334,577
and $25,717,415,
respectively)........... $30,000,727 $27,120,620 $32,030,589 $28,623,220 $27,490,044 $34,023,536 $25,717,415
Cash...................... 980 689 698 760 876 36,203 --
Foreign currency at value,
(cost $52,830).......... -- -- 52,728 -- -- -- --
Receivable for investments
sold.................... 593,622 -- -- 67,540 225,118 567,987 --
Interest and dividends
receivable.............. 29,179 77,625 85,175 229,061 223,126 412,936 68,158
Receivable for Fund shares
sold.................... 17,911,591 207,625 106,666 10,783,085 10,962 8,179,857 4,466,497
Deferred expenses and
other assets............ 54,890 54,839 54,997 56,237 54,775 66,175 56,516
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets........ 48,590,989 27,461,398 32,330,853 39,759,903 28,004,901 43,286,694 30,308,586
----------- ----------- ----------- ----------- ----------- ----------- -----------
Liabilities
Payable for investments
purchased............... 450,519 210,174 350,306 895,026 264,998 8,170,624 --
Payable for Fund shares
reacquired.............. 6,997 4,763 189,011 8,338 4,688 83 --
Accrued expenses.......... 55,891 60,771 62,581 45,375 53,396 68,179 42,367
Due to broker-variation
margin.................. -- 4,650 -- -- -- -- --
Due to Manager............ 76,274 35,640 17,760 22,470 16,114 29,752 28,298
Due to Administrator...... 3,303 3,073 3,608 3,165 3,120 3,069 2,957
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities... 592,984 319,071 623,266 974,374 342,316 8,271,707 73,622
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Assets................ $47,998,005 $27,142,327 $31,707,587 $38,785,529 $27,662,585 $35,014,987 $30,234,964
=========== =========== =========== =========== =========== =========== ===========
Net assets were comprised
of:
Shares of beneficial
interest, at par........ $ 3,967 $ 2,441 $ 2,567 $ 3,511 $ 2,345 $ 3,391 $ 30,235
Paid-in capital in excess
of par.................. 44,842,088 25,225,579 28,874,762 37,064,883 24,586,296 34,184,419 30,204,729
----------- ----------- ----------- ----------- ----------- ----------- -----------
44,846,055 25,228,020 28,877,329 37,068,394 24,588,641 34,187,810 30,234,964
Undistributed net
investment income....... 71,818 445,607 359,130 745,354 611,577 -- --
Accumulated net realized
gains................... 84,385 42,988 184,668 271,775 615,333 138,218 --
Net unrealized
appreciation on
investments and foreign
currencies.............. 2,995,747 1,425,712 2,286,460 700,006 1,847,034 688,959 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets, September 30,
1993...................... $47,998,005 $27,142,327 $31,707,587 $38,785,529 $27,662,585 $35,014,987 $30,234,964
=========== =========== =========== =========== =========== =========== ===========
Shares of beneficial
interest issued and
outstanding............. 3,966,529 2,441,117 2,567,150 3,510,852 2,344,532 3,390,600 30,234,964
=========== =========== =========== =========== =========== =========== ===========
Net asset value per
share................... $12.10 $11.12 $12.35 $11.05 $11.80 $10.33 $1.00
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
B-71
<PAGE>
THE PRUDENTIAL
STATEMENT OF
INSTITUTIONAL
OPERATIONS
FUND
PERIOD ENDED SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND* FUND* FUND* FUND** FUND* FUND*** FUND**
----------- ----------- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................ $ 45,802 $ 34,175 $ 69,247 $ 266,966 $ 458,871 $ 799,343 $ 620,864
Dividends............... 161,915+ 476,598+ 328,598+ 81,809+ 194,668+ -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total income.......... 207,717 510,773 397,845 348,775 653,539 799,343 620,864
----------- ----------- ----------- ----------- ----------- ----------- -----------
Expenses
Management fee.......... 111,337 68,014 150,665 66,355 110,128 75,122 84,206
Administration fee...... 22,268 23,801 18,342 13,271 22,026 21,034 26,197
Custodian's fees and
expenses.............. 60,000 107,000 72,000 44,000 61,000 42,000 37,500
Audit fee............... 10,000 10,000 12,000 10,000 10,000 10,000 8,000
Legal fees.............. 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Registration fees....... 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Reports to
shareholders.......... 10,000 10,000 10,000 5,000 10,000 5,000 5,000
Trustees' fees.......... 9,000 9,000 9,000 6,500 9,000 6,500 6,500
Amortization of
organization
expenses.............. 9,463 9,463 9,463 7,993 9,463 6,625 7,993
Transfer agent's fees
and expenses.......... 4,771 5,100 3,930 2,844 4,720 4,527 5,614
Miscellaneous........... 7,083 7,213 4,805 2,997 7,216 2,875 5,102
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses........ 263,922 269,591 310,205 178,960 263,553 193,683 206,112
Less: expense subsidy... (104,869) (167,571) (100,584) (84,167) (106,227) (88,512) (93,838)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net expenses.............. 159,053 102,020 209,621 94,793 157,326 105,171 112,274
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net investment income..... 48,664 408,753 188,224 253,982 496,213 694,172 508,590
----------- ----------- ----------- ----------- ----------- ----------- -----------
Realized and Unrealized
Gain(Loss) on Investment
Transactions
Net realized gain on
security transactions... 84,385 42,988 271,584 271,775 615,333 138,218 9,661
Net realized loss on
foreign currency
transactions............ -- -- (86,916) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
84,385 42,988 184,668 271,775 615,333 138,218 9,661
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net unrealized
appreciation on
Investments and foreign
currencies.............. 2,995,747 1,425,712 2,286,460 700,006 1,847,034 688,959 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net gain on investments... 3,080,132 1,468,700 2,471,128 971,781 2,462,367 827,177 9,661
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................ $ 3,128,796 $ 1,877,453 $ 2,659,352 $ 1,225,763 $ 2,958,580 $ 1,521,349 $ 518,251
=========== =========== =========== =========== =========== =========== ===========
<FN>
* Investment operations commenced on November 5, 1992.
** Investment operations commenced on January 4, 1993.
*** Investment operations commenced on March 1, 1993.
+ Net of foreign withholding taxes of $523, $3,473, $50,911, $1,132 and
$2,086, respectively.
</FN>
</TABLE>
See Notes to Financial Statements.
B-72
<PAGE>
THE PRUDENTIAL
STATEMENT OF CHANGES
INSTITUTIONAL
IN NET ASSETS
FUND
PERIOD ENDED SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND* FUND* FUND* FUND** FUND* FUND*** FUND**
----------- ----------- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Assets
Operations
Net investment income... $ 48,664 $ 408,753 $ 188,224 $ 253,982 $ 496,213 $ 694,172 $ 508,590
Net realized gain on
investments and
foreign currency
transactions.......... 84,385 42,988 184,668 271,775 615,333 138,218 9,661
Net unrealized
appreciation on
investments and
foreign currencies.... 2,995,747 1,425,712 2,286,460 700,006 1,847,034 688,959 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase in net
assets resulting from
operations............ 3,128,796 1,877,453 2,659,352 1,225,763 2,958,580 1,521,349 518,251
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net equalization
credits................. 45,668 108,290 185,770 491,372 178,724 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends to shareholders
from net investment
income.................. (22,514) (71,436) (14,864) -- (63,360) (694,172) (518,251)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fund share transactions
Net proceeds from shares
sold.................. 49,088,805 27,729,562 31,029,495 37,480,048 25,721,891 33,496,854 29,718,814
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends............. 22,514 71,436 14,864 -- 63,360 694,172 518,251
Cost of shares
redeemed.............. (4,290,264) (2,597,978) (2,192,030) (412,654) (1,221,610) (4,216) (3,101)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase in net
assets from Fund share
transactions.......... 44,821,055 25,203,020 28,852,329 37,067,394 24,563,641 34,186,810 30,233,964
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase.............. 47,973,005 27,117,327 31,682,587 38,784,529 27,637,585 35,013,987 30,233,964
Net Assets
Beginning of period..... 25,000 25,000 25,000 1,000 25,000 1,000 1,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
End of period........... $47,998,005 $27,142,327 $31,707,587 $38,785,529 $27,662,585 $35,014,987 $30,234,964
=========== =========== =========== =========== =========== =========== ===========
<FN>
* Investment operations commenced on November 5, 1992.
** Investment operations commenced on January 4, 1993.
*** Investment operations commenced on March 1, 1993.
</FN>
</TABLE>
See Notes to Financial Statements.
B-73
<PAGE>
THE PRUDENTIAL
FINANCIAL HIGHLIGHTS
INSTITUTIONAL
FUND
PERIOD ENDED SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND* FUND* FUND* FUND** FUND* FUND*** FUND**
<S> <C> <C> <C> <C> <C> <C> <C>
----------- ----------- ----------------- ----------- ----------- ----------- -----------
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, beginning
of period............... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 1.00
----------- ----------- ----------------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment income+.... .04 .23 .16 .21 .31 .27 .02
Net realized and
unrealized gains
(losses) on investment
and foreign currency
transactions............ 2.08 .94 2.21 .84 1.54 .33 --
----------- ----------- ----------------- ----------- ----------- ----------- -----------
Total from investment
operations.............. 2.12 1.17 2.37 1.05 1.85 .60 .02
----------- ----------- ----------------- ----------- ----------- ----------- -----------
Less dividends:
Dividends from investment
income.................. (.02) (.05) (.02) -- (.05) (.27) (.02)
----------- ----------- ----------------- ----------- ----------- ----------- -----------
Net asset value, end of
period.................. $ 12.10 $ 11.12 $ 12.35 $ 11.05 $ 11.80 $ 10.33 $ 1.00
=========== =========== ================= =========== =========== =========== ===========
TOTAL RETURN#............. 21.22% 11.73% 23.74% 10.50% 18.58% 6.11% 2.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 47,998 $ 27,142 $ 31,708 $ 38,786 $ 27,663 $ 35,015 $ 30,235
Average net assets
(000)................... $ 17,592 $ 18,807 $ 14,491 $ 12,815 $ 17,401 $ 25,626 $ 25,296
Ratios to average net
assets: +/++
Expenses................ 1.00% .60% 1.60% 1.00% 1.00% .70% .60%
Net investment income... .31% 2.41% 1.44% 2.68% 3.16% 4.62% 2.73%
Portfolio turnover rate... 84% 1% 15% 47% 74% 93% --
<FN>
- ---------------
* Investment operations commenced on November 5, 1992.
** Investment operations commenced on January 4, 1993.
*** Investment operations commenced on March 1, 1993.
+ Net of expense subsidy.
++ Annualized.
# 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. Total return for periods of less than a full
year are not annualized.
</FN>
</TABLE>
See Notes to Financial Statements.
B-74
<PAGE>
- -------------------------------------------------------------------------------
THE PRUDENTIAL
NOTES TO
[LOGO] INSTITUTIONAL
FINANCIAL STATEMENTS
FUND
- -------------------------------------------------------------------------------
The Prudential Institutional Fund (the Company) is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. (PIFM).
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
Securities, that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the sub-advisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer.
B-75
<PAGE>
- -------------------------------------------------------------------------------
THE PRUDENTIAL
NOTES TO
[LOGO] INSTITUTIONAL
FINANCIAL STATEMENTS
FUND
- -------------------------------------------------------------------------------
Forward currency exchange contracts shall be valued at the current cost of
covering or offsetting such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations. Short-term securities
held by the other Funds which mature in 60 days or less are valued at amortized
cost. In the event that a Subadviser determines that amortized cost does not
represent fair value regarding certain short-term securities with remaining
maturities of 60 days or less, such securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
a 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 is known as the
"initial margin". Subsequent payments, known as "variation margin", are made
or received by the Fund each day, depending on the daily fluctuations in the
value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Funds invest in financial futures
contracts solely for the purpose of hedging their existing portfolio securities
or securities the Funds intend to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, a 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.
Dollar Rolls: The Fund enters into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
B-76
<PAGE>
- -------------------------------------------------------------------------------
THE PRUDENTIAL
NOTES TO
[LOGO] INSTITUTIONAL
FINANCIAL STATEMENTS
FUND
- -------------------------------------------------------------------------------
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal period. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal period. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized gains (losses) on foreign currency transactions, if any,
represent net foreign exchange gains (losses) from holding of foreign
currencies, currency gains or losses realized between the trade and settlement
dates of securities transactions, and the difference between the amounts of
dividends and foreign taxes recorded on the Funds' books and the U.S. dollar
equivalent amounts actually received or paid. Net currency gains and losses from
valuing foreign currency denominated assets and liabilities at period end
exchange rates are reflected as a component of net unrealized
appreciation/depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Equalization: The Funds (except for the Income and Money Market Funds) follow
the accounting practice known as equalization by which a portion of the proceeds
from sales and costs of reacquisitions of Fund shares, equivalent on a per share
basis to the amount of distributable net investment income on the date of the
transaction, is credited or charged to undistributed net investment income. As a
result, undistributed net investment income per share is unaffected by sales or
reacquisitions of the Funds' shares.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the "ex-dividend" date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Funds' policy to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
B-77
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THE PRUDENTIAL
NOTES TO
[LOGO] INSTITUTIONAL
FINANCIAL STATEMENTS
FUND
- -------------------------------------------------------------------------------
Deferred Organizational Expenses: Costs incurred, estimated at $450,000, in
connection with the organization and initial registration of the Company were
paid initially by PIFM and Prudential Mutual Fund Management, Inc. (PMF). These
costs have been deferred and will be amortized ratably over the period of
benefit not to exceed 60 months from the date each of the Funds commence
investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the sub-adviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into sub-advisory agreements with The Prudential Investment
Corporation (PIC), Jennison Associates Capital Corp. (Jennison) and Mercator
Asset Management, Inc. (Mercator), each an indirect wholly-owned subsidiary of
Prudential. Each sub-adviser will furnish investment advisory services in
connection with the management of the various Funds. Jennison serves as
sub-adviser to the Growth Stock Fund and the Active Balanced Fund. PIC serves as
sub-adviser to the Balanced Fund, the Stock Index Fund, the Income Fund and the
Money Market Fund. Mercator serves as sub-adviser to the International Stock
Fund. PIFM will pay for the costs and expenses payable pursuant to the
subadvisory agreements and the salaries and expenses of all personnel of the
Company except for fees and expenses of unaffiliated Trustees. The Funds will
bear all other costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund that is
computed daily and payable monthly at the annual rate specified below of the
value of each Funds' average daily net assets:
Fund Management Fee
- ---- ---------------
Growth Stock Fund .70%
Stock Index Fund .40%
International Stock Fund 1.15%
Active Balanced Fund .70%
Balanced Fund .70%
Income Fund .50%
Money Market Fund .45%
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until October 30, 1994. For the period ended September 30, 1993,
PIFM subsidized the following amounts:
Percentage
of
Average Net Amount per
Fund Assets Share
- ---- ----------- ------------------
Growth Stock Fund .66% $ .086
Stock Index Fund .99 .094
International Stock Fund .77 .086
Active Balanced Fund .89 .070
Balanced Fund .68 .066
Income Fund .59 .031
Money Market Fund .50 .004
The Company has entered into an administration agreement with PMF, an
indirect wholly-owned subsidiary of Prudential. The administration fee paid PMF
will be computed daily and payable monthly, at an annual rate of .17% of the
Company's daily net assets up to $250 million and .15% of the Company's average
daily net assets in excess of $250 million. PMF will furnish to the Company such
services as the Company may require in connection with administration of the
Company's business affairs. PMF will also provide certain transfer agent
services through its wholly-owned subsidiary, Prudential Mutual Fund Services,
Inc. (PMFS). For such services, PMFS will be paid .03% of the Company's daily
net assets up to $250 million and .02% of the Company's average daily net assets
in excess of $250 million from the administration fee paid PMF.
B-78
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THE PRUDENTIAL
NOTES TO
[LOGO] INSTITUTIONAL
FINANCIAL STATEMENTS
FUND
- -------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
For the fiscal period ended September 30, 1993, Prudential Securities
Incorporated, an affiliate of PIFM, earned $1,528 in brokerage commissions from
portfolio transactions executed on behalf of the Balanced Fund.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the period ended September 30, 1993 were as follows:
Fund Purchases Sales
- ---- ----------- -----------
Growth Stock Fund $36,842,810 $11,269,214
Stock Index Fund 24,180,800 91,665
International Stock Fund 28,765,910 1,939,590
Active Balanced Fund 22,911,413 4,380,457
Balanced Fund 33,352,326 11,091,005
Income Fund 56,335,557 23,965,693
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of September 30, 1993 were as follows:
Net Unrealized
Appreciation/ Gross Unrealized
Fund Basis Depreciation Appreciation Depreciation
- ---- ----------- -------------- ------------ ------------
Growth Stock Fund $27,017,514 $2,983,213 $3,627,039 $ 643,826
Stock Index Fund 25,697,672 1,422,948 2,656,217 1,233,269
International Stock 29,743,904 2,286,685 2,779,265 492,580
Active Balanced 27,924,640 698,580 1,008,217 309,637
Balanced Fund 25,650,919 1,839,125 2,002,722 163,597
Income Fund 33,334,577 688,959 701,825 12,866
At September 30, 1993, the Stock Index Fund purchased three financial futures
contracts on the S&P 500 Index expiring 1994. The value at disposition of such
contracts was $1,376,520. The value of such contracts on September 30, 1993, was
$1,378,050, thereby resulting in an unrealized gain of $1,530. The Stock Index
Fund has pledged $60,000 United States Treasury Bills as initial margin on such
contracts.
Note 5. Joint Repurchase Agreement Account
The Company, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At September 30,
1993, the Company had a 1.91% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $18,317,000 in
principal amount, in the aggregate, as follows:
Percentage Principal
Company Interest Amount
- ------- ----------- -----------
Growth Stock Fund .14% $1,347,000
Stock Index Fund .16 1,539,000
International Stock Fund .28 2,646,000
Active Balanced Fund .95 9,135,000
Balanced Fund .29 2,802,000
Income Fund .09 848,000
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 3.35%, dated 9/30/93, in the principal amount of
$260,000,000, repurchase price $260,024,194, due 10/1/93; collateralized by
$14,430,000 U.S. Treasury Notes, 5.125%, due 3/31/98; $22,000,000 U.S. Treasury
Notes, 7.625%, due 5/31/96; $36,275,000 U.S. Treasury Notes, 8.50%, due 3/31/94;
$45,000,000 U.S. Treasury Notes, 6.875%, due 8/15/94; $91,570,000 U.S. Treasury
Bills, 3.35%, due 12/30/93 and $49,100,000 U.S. Treasury Notes, 5.375%, due
5/31/98; aggregate value including interest--$265,533,343.
Morgan Stanley & Co., Inc., 3.30%, dated 9/30/93, in the principal amount of
$275,000,000, repurchase price $275,025,208, due 10/1/93; collateralized by
$200,000,000 U.S. Treasury Notes, 8.50%, due 8/15/95 and $61,405,000 U.S.
Treasury Notes, 3.875%, due 3/31/95; aggregate value including
interest--$280,760,268.
Kidder, Peabody & Co., Inc., 3.40%, dated 9/30/93, in the principal amount of
$75,406,000, repurchase price $75,413,122, due 10/1/93; collateralized by
$15,385,000 U.S. Treasury Bonds, 8.750%,
B-79
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THE PRUDENTIAL
NOTES TO
[LOGO] INSTITUTIONAL
FINANCIAL STATEMENTS
FUND
- -------------------------------------------------------------------------------
due 11/15/08 and $50,000,000 U.S. Treasury Bonds, 7.250%, due 5/15/16; aggregate
value including interest--$77,089,431.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 3.20%, dated 9/30/93, in the
principal amount of $150,000,000, repurchase price $150,013,333, due 10/1/93;
collateralized by $49,000,000 U.S. Treasury Notes, 8.50%, due 3/31/94,
$48,000,000 U.S. Treasury Notes, 7.875%, due 4/15/98 and $41,005,000 U.S.
Treasury Notes, 7.875%, due 1/15/98; aggregate value including
interest--$153,247,629.
Morgan (J.P.) Securities, Inc., 3.25%, dated 9/30/93, in the principal amount
of $200,000,000, repurchase price $200,018,056, due 10/1/93; collateralized by
$150,000,000 U.S. Treasury Notes, 8.50%, due 7/15/97 and $30,890,000 U.S.
Treasury Notes, 3.875%, due 3/31/95; aggregate value including interest--
$204,579,885.
Note 6. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share. Of the shares outstanding at September 30, 1993,
PIFM and affiliates owned the following shares:
Fund Shares
- ---- ----------
Growth Stock Fund 2,286,969
Stock Index Fund 2,373,020
International Stock Fund 2,546,365
Active Balanced Fund 2,341,129
Balanced Fund 2,302,465
Income Fund 2,568,415
Money Market Fund 25,517,872
Transactions in shares of beneficial interest during the period ended
September 30, 1993 were as follows:
<TABLE>
<CAPTION>
Shares
Issued in Increase
Shares Reinstatement Shares in Shares
Fund Sold of Dividends Redeemed Outstanding
- ---- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 4,341,461 2,064 (379,496) 3,964,029
Stock Index Fund 2,674,154 6,823 (242,360) 2,438,617
International Stock Fund 2,749,239 1,453 (186,042) 2,564,650
Active Balanced Fund 3,550,356 -- (39,604) 3,510,752
Balanced Fund 2,447,014 6,175 (111,157) 2,342,032
Income Fund 3,322,489 68,418 (407) 3,390,500
Money Market Fund 29,718,814 518,251 (3,101) 30,233,964
</TABLE>
B-80
<PAGE>
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THE PRUDENTIAL
INDEPENDENT
[LOGO] INSTITUTIONAL
AUDITORS' REPORT
FUND
- -------------------------------------------------------------------------------
The Shareholders and Trustees of
The Prudential Institutional Fund:
We have audited the accompanying statements of assets and liabilities of The
Prudential Institutional Fund (consisting of the Growth Stock Fund, Stock Index
Fund, International Stock Fund, Active Balanced Fund, Balanced Fund, Income Fund
and Money Market Fund), including the portfolios of investments, as of September
30, 1993, the related statements of operations and of changes in net assets, and
the financial highlights for the periods presented. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1993, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting The Prudential Institutional Fund as of
September 30, 1993, the results of their operations, the changes in their net
assets, and the financial highlights for the periods presented in conformity
with generally accepted accounting principles.
Deloitte & Touche
New York, New York
November 5, 1993
B-81
<PAGE>
September 30, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Prudential Institutional Fund
(File No. 33-48066)
---------------------------------
Ladies and Gentlemen:
In accordance with Rule 497(e) under the Securities Act of 1933, enclosed
herein please find a copy of a supplement to the prospectus and statement of
additional information, each dated October 4, 1994 for the above-referenced
Fund.
The enclosed is being filed electronically via EDGAR.
Yours truly,
Domenick Pugliese
Assistant Secretary
DP/dmm
Enclosures
