PRUDENTIAL ACTIVE BALANCED FUND
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Supplement dated June 18, 1997 to
Prospectus dated November 29, 1996
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The Prospectus is hereby supplemented by replacing page 6 with the
following:
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A, CLASS B, CLASS C AND CLASS Z SHARES)
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The following financial highlights for Class A, Class B and Class C
shares and for Class Z shares for the period ended March 31, 1997 are unaudited.
The financial highlights for periods prior to the periods ended March 31, 1997
have been audited by Deloitte & Touche LLP, independent auditors, whose report
thereon was unqualified. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class A, Class B, Class C and Class Z share of beneficial interest,
respectively, outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information has been determined
based on data contained in the financial statements. Further performance
information is contained in the annual report, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
----------- ----------- ---------- -----------------------------------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, JANUARY 4,
1996(E) 1996(E) 1996(E) SIX MONTHS 1993(A)
THROUGH THROUGH THROUGH ENDED YEAR ENDED SEPTEMBER 30, THROUGH
MARCH 31, MARCH 31, MARCH 31, MARCH 31, ------------------------ SEPTEMBER 30,
1997 1997 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..$13.40 $13.40 $13.40 $ 13.01 $ 12.46 $ 10.92 $ 11.05 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................. .18 .14 .14 .20 .29(b) .33(b) .24(b) .21(b)
Net realized and unrealized gain
(loss) on investment transactions .... .05 .06 .06 .43 .81 1.54 (.12) .84
------ ------ ------ -------- -------- -------- ------- -------
Total from investment operations ..... .23 .20 .20 .63 1.10 1.87 .12 1.05
------ ------ ------ -------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income .. (.39) (.39) (.39) (.39) (.37) (.29) (.14) --
Distributions from net realized gains . (.78) (.78) (.78) (.78) (.18) (.04) (.11) --
------ ------ ------ -------- -------- -------- ------- -------
Total distributions .................. (1.17) (1.17) (1.17) (1.17) (.55) (.33) (.25) --
------ ------ ------ -------- -------- -------- ------- -------
Net asset value, end of period ........$12.46 $12.43 $12.43 $ 12.47 $ 13.01 $ 12.46 $ 10.92 $ 11.05
====== ====== ====== ======== ======== ======== ======= =======
TOTAL RETURN(D): ...................... 1.50% 1.34% 1.34% 4.71% 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .......$ 2 $ 50 $ 197(f) $145,529 $153,588 $133,352 $81,176 $38,786
Average net assets (000) ..............$ 2 $ 7 $ 163(f) $156,582 $142,026 $104,821 $58,992 $12,815
Ratios to average net assets(b):
Expenses, including distribution
fees ................................ 1.21%(c) 1.96%(c) 1.96%(c) .96%(c) 1.00% 1.00% 1.00% 1.00%(c)
Expenses, excluding distribution
fees ................................ .96%(c) .96%(c) .96%(c) .96%(c) N/A N/A N/A N/A
Net investment income ................ 2.75%(c) 2.00%(c) 2.00%(c) 3.00%(c) 3.09% 3.53% 3.06% 2.68%(c)
Portfolio turnover rate ............... 23% 23% 23% 23% 51% 30% 40% 47%
Average commission rate paid
per share ...........................$.0604 $.0604 $.0604 $ .0604 $ .0654 N/A N/A N/A
</TABLE>
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
(e) Commencement of offering of Class A, B and C shares.
(f) Figure is actual and not rounded to nearest thousand.
N/A-Data not required for these periods.
<PAGE>
The following information further supplements the Prospectus of the
Fund.
FUND HIGHLIGHTS--WHO MANAGES THE FUND? AND
HOW THE FUND IS MANAGED--MANAGER
The Prospectus is supplemented by adding the following information to
pages 3 and 19:
Effective May 1,1997, the Fund's Manager, formerly known as Prudential
Mutual Fund Management LLC, changed its name to PrudentiaI Investments Fund
Management LLC (PIFM).
SHAREHOLDER GUIDE
ALTERNATIVE PURCHASE PLAN
CLASS A SHARES
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Class A shares may be
purchased at net asset value (NAV) through Prudential Securities Incorporated
(Prudential Securities) or Prudential Mutual Fund Services LLC (Transfer Agent),
by investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds from a tax-free rollover of assets from a Benefit Plan for
which The Prudential Investment Corporation, doing business as Prudential
Investments, serves as the recordkeeper or administrator.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV
by certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which The Prudential
Insurance Company of America (Prudential) serves as the plan administrator or
recordkeeper, provided that (i) the plan has at least $1 million in existing
assets or 250 eligible employees and (ii) the Fund is an available investment
option. These plans include pension, profit-sharing, stock-bonus or other
employee benefit plans under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code and plans that participate in the Transfer Agent's PruArray and
SmartPath Programs (benefit plan recordkeeping services) (hereafter referred to
as a PruArray or SmartPath Plan). All plans of a company for which Prudential
serves as plan administrator or recordkeeper are aggregated in meeting the $1
million threshold. The term "existing assets" as used herein includes stock
issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray or SmartPath
Program. "Existing assets" also include monies invested in The Guaranteed
Interest Account (GIA), a group annuity insurance product issued by Prudential,
and units of The Stable Value Fund (SVF), an unaffiliated bank collective fund.
Class A shares may also be purchased at NAV by plans that have monies invested
in GIA and SVF, provided (i) the purchase is made with the proceeds of a
redemption from either GIA or SVF and (ii) Class A shares are an investment
option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at
NAV to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association (Association)
that participate in the PruArray Program provided that the Association enters
into a written agreement with Prudential. Such Benefit Plans or non-qualified
plans may purchase Class A shares at net asset value without regard to the
assets or number of participants in the individual employer's qualified plan(s)
or non-qualified plans so long as the employers in the Association (i) have
retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (ii) maintain their accounts with the Fund's
Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (i) employees who open an
IRA or Savings Accumulation Plan account with the Fund's transfer agent and (ii)
spouses of employees who open an IRA account with the Fund's transfer agent. The
program is offered to companies that have at least 250 eligible employees.
2
<PAGE>
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(i) officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (ii) empIoyees of Prudential Securities and PIFM and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (iii)
employees of subadvisers of the Prudential MutuaI Funds provided that purchases
at NAV are permitted by such person's employer, (iv) Prudential, employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(v) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (vi) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less) and (iii)
the financial adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS Z SHARES
Class Z shares are currently available for purchases by the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans); provided that such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets,
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option, (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by Prudential, for whom Class Z shares of
the Prudential Mutual Funds are an available investment option, (iv) Benefit
Plans for which Prudential Retirement Services serves as recordkeeper and as of
September 20, 1996 (a) were Class Z shareholders of the Prudential Mutual Funds
or (b) executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds, (v) current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
HOW TO SELL YOUR SHARES
In the case of redemptions from a PruArray or SmartPath Plan, if the
proceeds of the redemption are invested in another investment option of the
plan, in the name of the record holder and at the same address as reflected in
the Transfer Agent's records, a signature guarantee is not required.
3
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES
SYSTEMATIC WITHDRAWAL PLAN. The contingent deferred sales charge (CDSC)
will be waived (or reduced) on certain redemptions from a Systematic Withdrawal
Plan. On an annual basis, up to 12% of the total dollar amount subject to the
CDSC may be redeemed without charge. The Transfer Agent will calculate the total
amount available for this waiver annually, on the earlier of March 1,1997 or the
anniversary date of your purchase. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% amount is reached.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions
from qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
MF 174 C-4 (6/18/97)
4
<PAGE>
PRUDENTIAL ACTIVE BALANCED FUND
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PROSPECTUS DATED NOVEMBER 29, 1996
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Prudential Active Balanced Fund (the Fund) is a series of Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Company), a diversified,
open-end, management investment company. The Fund's investment objective is 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. There can be
no assurance that the Fund's investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, Newark, NJ 07102-4077, and its telephone number is (800) 225-1852.
THE FUND RESERVES THE RIGHT TO BORROW MONEY FOR TEMPORARY, EXTRAORDINARY OR
EMERGENCY PURPOSES OR FOR THE CLEARANCE OF TRANSACTIONS AND IN ORDER TO TAKE
ADVANTAGE OF INVESTMENT OPPORTUNITIES, WHICH MAY BE CONSIDERED SPECULATIVE DUE
TO THE INCREASED COSTS AND EXPENSES INVOLVED.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated November 29, 1996, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
- --------------------------------------------------------------------------------
WHAT IS PRUDENTIAL ACTIVE BALANCED FUND?
Prudential Active Balanced Fund is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Company is a diversified, open-end,
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective 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 money market instruments. The Fund's investments will be
actively 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. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 7.
RISK FACTORS AND SPECIAL CHARACTERISTICS
With respect to the equity portion of the Fund, the Fund invests
primarily in common stocks of established companies with growth prospects which
are, in the opinion of the Fund's investment adviser, Jennison Associates
Capital Corp. (Jennison), underappreciated by the market. These may include
companies that are experiencing important changes in their business structure
and management philosophy. The ability of the investment adviser to successfully
identify these changes will be an important factor in the Fund's performance
record. See "How the Fund Invests--Investment Objective and Policies" at page 7.
The Fund may invest up to 15% of its total assets in equity securities
and 20% of its total assets in debt securities of foreign issuers. Investing in
securities of foreign companies and countries involves certain risks and
considerations not typically associated with investments in domestic companies.
See "How the Fund Invests--Risk Factors and Special Considerations of Investing
in Foreign Securities" at page 14. The Fund may commit up to 20% of the value of
its total assets to investment techniques such as dollar rolls, forward rolls
and reverse repurchase agreements. See "How the Fund Invests--Investment
Objective and Policies--Forward Rolls, Dollar Rolls and Reverse Repurchase
Agreements" at page 9. The Fund may invest up to 5% of its total assets in
non-investment grade debt securities or in unrated securities of comparable
quality. Non-investment grade securities are securities rated lower than Baa by
Moody's Investors Service, Inc. or BBB by Standard & Poor's Ratings Group and
are commonly known as "junk bonds." These securities are considered speculative
and are subject to a greater risk of loss of principal and interest than higher
rated securities as well as greater price volatility. See "How the Fund
Invests--Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)" at page 14. The Fund also may engage in various
hedging and return enhancement strategies and invest in derivative securities.
See "How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of
Hedging and Return Enhancement Strategies" at page 18. As with an investment in
any mutual fund, an investment in this Fund can decrease in value and you can
lose money.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the
manager of the Company and is compensated by the Fund for its services at an
annual rate of .65 of 1% of average daily net assets of the Fund. As of October
31, 1996, PMF served as manager or administrator to 62 investment companies,
including 40 mutual funds, with aggregate assets of approximately $53.4 billion.
Jennison furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PMF. The Prudential
Investment Corporation (PIC) invests available cash balances for the Fund
through a joint repurchase agreement account. See "How the Fund is
Managed--Manager" at page 19 and "How the Fund is Managed--Subadvisers" at page
19.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. Prudential Securities is paid a distribution and service fee
with respect to Class A shares which is currently being charged at the annual
rate of .25 of 1% of the average daily net assets of the Class A shares and is
paid a distribution and service fee with respect to Class B and Class C shares
at an annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. Prudential Securities incurs the expense of distributing the
Fund's Class Z shares under a Distribution Agreement with the Company, none of
which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 20.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 per class for Class A and
Class B shares and $5,000 for Class C shares. There is no minimum initial
investment requirement for investors who qualify to purchase Class Z shares. The
minimum subsequent investment is $100 for all classes, except for Class Z shares
for which there is no such minimum. There is no minimum investment requirement
for certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 26 and "Shareholder
Guide--Shareholder Services" at page 35.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities,
Pruco Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt of
your purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or(ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at NAV without any sales charge.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about Class Z shares.
See "How the Fund Values its Shares" at page 22 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 26.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 5% of
the offering price.
o Class B Shares: Sold without an initial sales charge but are subject
to a contingent deferred sales charge or CDSC
(declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
o Class C Shares: Sold without an initial sales charge but, for one
year after purchase, are subject to a CDSC of 1% on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
o Class Z Shares: Sold without an initial or contingent deferred sales
charge to a limited group of investors. Class Z
shares are not subject to any ongoing service- or
distribution-related expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 27.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about selling
their Class Z shares. See "Shareholder Guide--How to Sell Your Shares" at page
30.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 23.
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4
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES**
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES_
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ........... 5% None None None
Maximum Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds,
whichever is lower) ........................... None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within one
to 1% in the fifth and sixth year of purchase
years and 0% the seventh
year*
Maximum Sales Load
Imposed on Reinvested Dividends ............... None None None None
Redemption Fees ................................ None None None None
Exchange Fee ................................... None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES**
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
(as a percentage of average net assets)
Management Fees ................................ .65% .65% .65% .65%
12b-1 Fees (After Reduction) ................... .25%++ 1.00% 1.00% None
Other Expenses ................................. .24% .24% .24% .24%
---- ---- ---- ---
Total Fund Operating Expenses
(After Reduction) ............................. 1.14% 1.89% 1.89% .89%
==== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A ............................................................................ $61 $84 $110 $182
Class B ............................................................................ $69 $89 $112 $192
Class C ............................................................................ $29 $59 $102 $221
Class Z ............................................................................ $ 9 $28 $ 49 $110
You would pay the following expenses on the same investment, assuming no redemption:
Class A ............................................................................ $61 $84 $110 $182
Class B ............................................................................ $19 $59 $102 $192
Class C ............................................................................ $19 $59 $102 $221
Class Z ............................................................................ $ 9 $28 $ 49 $110
</TABLE>
The above example is based on restated data for the Fund's fiscal year
ended September 30, 1996 which would be expected to have been incurred if
the Fund operated in accordance with the new fee and operating expense
arrangements which were effective October 31, 1996. The example should not
be considered a representation of past or future expenses. Actual expenses
may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes estimated
operating expenses of the Fund for the fiscal year ended September 30, 1996,
such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian (domestic and foreign) fees (but
excludes foreign withholding taxes).
- ----------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Prior to October 30, 1996, the Fund had one class of shares which became
Class Z shares effective October 30, 1996.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges (12b-1 fees) on shares of the Fund may not
exceed 6.25% of total gross sales, subject to certain exclusions. This
6.25% limitation is imposed on each class of the Fund rather than on a per
shareholder basis. Therefore, long-term Class B and Class C shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to
limit its distribution fees with respect to Class A shares of the Fund so
as not to exceed .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending September 30, 1997. See "How the Fund is
Managed--Distributor." Total Fund Operating Expenses would be 1.19% absent
this limitation with respect to Class A shares.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte &
Touche LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide -- Shareholder Services -- Reports to Shareholders." During
these periods, no Class A, Class B or Class C shares were outstanding.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 4,
YEAR ENDED 1993(A)
SEPTEMBER 30, THROUGH
-------------------------------- SEPTEMBER
1996 1995 1994 30, 1993
-------- -------- ------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................ $ 12.46 $ 10.92 $ 11.05 $ 10.00
-------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b) ............................ .29 .33 .24 .21
Net realized and unrealized gain (loss) on investment
and foreign currency transactions .................. .81 1.54 (.12) .84
-------- -------- ------- -------
Total from investment operations ................... 1.10 1.87 .12 1.05
======== ======== ======= =======
LESS DISTRIBUTIONS:
Dividends from net investment income ................ (.37) (.29) (.14) --
Distributions from net realized income .............. (.18) (.04) (.11) --
-------- -------- ------- -------
Total distributions ................................ (.55) (.33) (.25) --
-------- -------- ------- -------
Net asset value, end of period ...................... $ 13.01 $ 12.46 $ 10.92 $ 11.05
======== ======== ======= =======
TOTAL RETURN(D): .................................... 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ..................... $153,588 $133,352 $81,176 $38,786
Average net assets (000) ............................ $142,026 $104,821 $58,992 $12,815
Ratios to average net assets(b):
Expenses ........................................... 1.00% 1.00% 1.00% 1.00%(c)
Net investment income .............................. 3.09% 3.53% 3.06% 2.68%(c)
Portfolio turnover rate ............................. 51% 30% 40% 47%
Average commission rate paid per share .............. $ .0654 N/A N/A N/A
</TABLE>
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(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and other distributions. Total return for
periods of less than a full year are not annualized. Total return includes
the effect of expense subsidies.
- --------------------------------------------------------------------------------
6
<PAGE>
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HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE 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 MONEY MARKET INSTRUMENTS. THERE CAN BE NO ASSURANCE THAT
THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment Objectives and
Policies--Investment Policies Applicable to Prudential Active Balanced Fund" in
the Statement of Additional Information.
Jennison, the investment adviser to the Fund, uses the following ranges
as the normal operating parameters for the securities to be purchased by 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 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 Fund's investments will be actively 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 or are attractively valued. The fixed income
component of this Fund will be invested primarily in fixed income securities
rated A or better by Moody's Investors Service, Inc. (Moody's) or Standard &
Poor's Ratings Group (S&P Ratings) or, if not rated, determined by Jennison to
be of comparable quality to securities so rated. However, the Fund also may
invest up to 20% of the fixed income portion of its portfolio in securities
rated Baa/BBB (or the equivalent rating of another nationally recognized
statistical rating organization (NRSRO)) 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 5 and 25 years.
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
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,
its agencies and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to
meet redemptions, or for hedging or incidental return enhancement, 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; (iv) purchase and sell futures contracts on stock indices and interest
rate indices and options thereon and (v) purchase and sell futures contracts on
securities.
The Fund also may: (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and currency forward contracts; and
(iii) purchase and sell put and call options on currencies and on foreign
currency futures contracts in each case to attempt to reduce risks associated
with currency fluctuations.
The Fund reserves the right as a defensive measure to hold temporarily
other types of securities without limit, including high quality commercial
paper, bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign
7
<PAGE>
currencies or U.S. dollars), in such proportions as, in the opinion of Jennison,
prevailing market, economic or political conditions warrant. The Fund may also
temporarily hold cash and invest in high quality foreign or domestic money
market instruments pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs. See "Other Investments and Policies"
below.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND THEREFORE
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
FUND'S OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT
OF 1940 (THE INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF TRUSTEES OF THE COMPANY (TRUSTEES).
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S.
Treasury or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--Investment Policies Applicable to Both
Funds--U.S. Government Securities" in the Statement of Additional Information.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in investment grade corporate and other debt
obligations of domestic and foreign issuers, including convertible securities
and money market instruments. See "Money Market Instruments" below. Bonds and
other debt securities are used by issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and must repay the
amount borrowed at maturity. Investment grade debt securities are rated within
the four highest quality grades as determined by Moody's (currently Aaa, Aa, A
and Baa for bonds), or S&P Ratings (currently AAA, AA, A and BBB for bonds), or
by another NRSRO or, in unrated securities which are of equivalent quality in
the opinion of Jennison. Securities rated Baa by Moody's, although considered to
be investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.
NON-INVESTMENT GRADE FIXED INCOME SECURITIES
Up to 5% of the total assets of the Fund may be invested in
non-investment grade fixed income securities, including convertible securities.
See "Convertible Securities, Warrants and Rights" below. Non-investment grade
fixed income securities (those rated below Baa by Moody's or BBB by S&P Ratings
or comparably rated by another NRSRO or unrated securities determined by
Jennison to be of comparable quality) have speculative characteristics
(including the possibility of default or bankruptcy of the issuers of such
securities, market price volatility based upon interest rate sensitivity,
questionable creditworthiness and relative liquidity of the secondary trading
market). Because these securities have been found to be more sensitive to
adverse economic changes or individual corporate developments and less sensitive
to interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for these securities and adversely affect the value of
these securities and the ability of issuers to repay principal and interest. See
"Risk Factors Relating to Investing in Debt Securities Rated Below Investment
Grade (Junk Bonds)" below.
EQUITY-RELATED SECURITIES
The Fund may invest in equity-related securities. Equity-related
securities are common stocks, preferred stocks, rights, warrants and debt
securities or preferred stocks which are convertible or exchangeable for common
stocks or preferred stocks. See "Convertible Securities, Warrants and Rights"
below.
8
<PAGE>
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 securities of the same or
adifferent 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. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation dependent upon a
market price advance in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer. See "Risk Factors Relating
to Investing in Debt Securities Rated Below Investment Grade (Junk Bonds)"
below.
In recent years, convertible securities have been developed which
combine higher or lower current income with options and other features. The Fund
may invest in these types of convertible securities.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest a portion of its assets in fixed income securities
and equity securities of foreign issuers (denominated in either U.S. or foreign
currency). The Fund may purchase American Depositary Receipts (ADRs), which are
U.S. dollar-denominated certificates issued by a U.S. 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 U.S. bank and traded on a U.S. 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.
FORWARD ROLLS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Fund may commit up to 20% of the value of its total assets to
investment techniques such as dollar rolls, forward rolls and reverse repurchase
agreements. A forward roll is a transaction in which the 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
9
<PAGE>
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 the Fund of portfolio
securities to a financial institution concurrently with an agreement by the 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
(SEC) has taken the position that reverse repurchase agreements, forward rolls
and dollar rolls are to be treated as borrowings. The Company expects that under
normal conditions most of the borrowings of the Fund will consist of such
investment techniques rather than bank borrowings. See "Other Investments and
Policies--Borrowing" below.
CUSTODIAL RECEIPTS
The 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 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. Government
securities and are neither insured nor guaranteed by the U.S. Government.
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 collateralized mortgage obligations
(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 prepayments. Typically, CMOs are collateralized by Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) or
Federal Home Loan Mortgage Corporation (FHLMC) Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities
(referred to below as Underlying Assets).
10
<PAGE>
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 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 may be
unsecured (such as credit card receivable securities). 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 the 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 the 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
11
<PAGE>
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 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 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 Fund will not pay any fees for credit support, although the
existence of credit support may increase the price of a security.
LIQUIDITY PUTS
The 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."
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated or denominated in a foreign currency. Money market instruments
typically have a maturity of one year or less as measured from the date of
purchase. The Fund may invest in money market instruments without limit for
temporary defensive and cash management purposes. To the extent the Fund
otherwise invests in money market instruments, it is subject to the limitations
described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of
its total assets (calculated when the loan is made) from banks or through
forward rolls, dollar rolls or reverse repurchase agreements to take advantage
of investment opportunities, for temporary, extraordinary or emergency purposes
or for the clearance of transactions. The Fund may pledge up to 20% of its total
assets to secure these borrowings. If the Fund's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings. The
Fund will not purchase portfolio securities when borrowings exceed 5% of the
value of its total assets. See "Investment Objectives and Policies--Investment
Policies Applicable to Both Funds--Borrowing" in the Statement of Additional
Information.
ILLIQUID SECURITIES
The Fund may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and
12
<PAGE>
securities that are not readily marketable in securities markets either within
or outside of the United States. Restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities.See "Investment Restrictions" in the Statement
of Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of
the security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss. The Fund may participate in a joint repurchase account
managed by PIC. See "Investment Objectives and Policies--Investment Policies
Applicable to Both Funds--Repurchase Agreements" in the Statement of Additional
Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities (including equity securities)
on a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on a
when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash or liquid
assets having a value equal to or greater than the Fund's purchase commitments.
Subject to this requirement, the Fund may purchase securities on such basis
without limit. See "Investment Objectives and Policies--Investment Policies
Applicable to Both Funds--When-Issued and Delayed Delivery Securities" in the
Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks
or other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As with any
extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. As a matter of fundamental policy, the Fund cannot lend more than
30% of the value of its total assets. See "Investment Objectives and
Policies--Investment
13
<PAGE>
Policies Applicable to Both Funds--Securities Lending" in the Statement of
Additional Information. The Fund may pay reasonable administration and custodial
fees in connection with a loan.
SEGREGATED ACCOUNTS. The Fund will establish a segregated account with
its Custodian, State Street Bank and Trust Company (State Street), in which it
will maintain cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets 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 and options on
futures contracts (unless otherwise covered). The assets deposited in the
segregated account will be marked-to-market daily.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR ECONOMIC
INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF PREDICTING
INTERNATIONAL TRADE PATTERNS, THE POSSIBLE 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 instrumentalities or agencies. 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 reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costsas well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be
affected by changes in currency exchange rates and in exchange control
regulations, and costs will be incurred in connection with conversions between
currencies. A change in the value of any such currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
securities denominated in that currency. Such changes also will affect the
Fund's income and distributions to shareholders. In addition, although the Fund
will receive income in such currencies, the Fund will be required to compute and
distribute its income in U.S. dollars. Therefore, if the exchange rate for any
such currency declines after the Fund's income has been accrued and translated
into U.S. dollars, the Fund could be required to liquidate portfolio securities
to make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the equivalent
amount in any such currency of such expenses at the time they were incurred. The
Fund may, but need not, enter into forward foreign currency exchange contracts,
options on foreign currencies and futures contracts on foreign currencies and
related options, for hedging purposes, including: locking-in the U.S. dollar
price of the purchase or sale of securities denominated in a foreign currency;
locking-in the U.S. dollar equivalent of dividends to be paid on such securities
which are held by the Fund; and protecting the U.S. dollar value of such
securities which are held by the Fund.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)
The Fund may invest up to 5% of its total assets in non-investment
grade debt securities, including convertible securities. Fixed income securities
are subject to the risk of an issuer's inability to meet principal and interest
payments
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on the obligations (credit risk) and may also be subject to price volatility due
to such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated (i.e., high yield or high risk) securities (commonly referred
to as junk bonds) are more likely to react to developments affecting market and
credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.
Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may not
be as liquid as the secondary market for more highly rated securities and, from
time to time, it may be more difficult to value high yield securities than more
highly rated securities. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices in calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the debt portion of its portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
From time to time, federal laws have been enacted which have required
the divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high yield
bonds. These types of laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. There is currently no legislation pending that would
adversely impact the market for junk bonds. However, there can be no assurance
that such legislation will not be proposed or enacted in the future.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. THE FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. These strategies currently include the use of derivatives, such as
options, forward currency exchange contracts and futures contracts and options
thereon. The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Investment Objectives
and Policies" and "Taxes" in the Statement of Additional Information. Jennison
does not intend to buy all of these instruments or use all of these strategies
to the full extent permitted unless it believes that doing so will help the Fund
achieve its objective. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
ANY SECURITIES IN WHICH IT MAY INVEST OR OPTIONS ON ANY SECURITIES INDEX BASED
ON SECURITIES IN WHICH THE FUND MAY INVEST. THESE OPTIONS ARE TRADED ON U.S. OR
FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO HEDGE ITS
PORTFOLIO. The Fund may write covered put and call options to generate
additional income through the receipt of premiums, purchase put options in an
effort to
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protect the value of securities (or currencies) that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in the price of securities (or currencies) it intends to purchase. The
Fund may also purchase put and call options to offset previously written put and
call options of the same series. See "Investment Objectives and
Policies--Investment Policies Applicable to Both Funds--Options on Securities
and Securities Indices" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES, SECURITIES IN
THE INDEX OR CURRENCY SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE
PRICE OR STRIKE PRICE). The writer of a call option, in return for the premium,
has the obligation, upon exercise of the option, to deliver, depending upon the
terms of the option contract, the underlying securities or a specified amount of
cash to the purchaser upon receipt of the exercise price. When the Fund writes a
call option, the Fund gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT,
FOR A SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO
THE OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer
of the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered
if, as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains in a
segregated account cash or liquid assets in an amount equal to or greater than
its obligation under the option. Under the first circumstance, the Fund's losses
are limited because it owns the underlying security or currency; under the
second circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited. See "Investment Objectives and Policies-- Investment
Policies Applicable to Both Funds--Options on Securities and Securities Indices"
in the Statement of Additional Information. There is no limitation on the amount
of options the Fund may write.
The Fund would normally purchase put options to hedge against a decline
in the market value of securities in its portfolio (protective puts). The
purchase of a put option would entitle the 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. The 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. The
Fund may also write a call option, which can serve as a limited short hedge
because decreases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value.
The Fund may purchase and sell put and call options on securities
indices for hedging against a decline in the value of the securities owned by
the Fund or against an increase in the market value of the type of securities in
which the Fund may invest. 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. When purchasing or selling securities index
options, the Fund is subject to the risk that the value of its portfolio
securities may not change as much as or more than the index because the Fund's
investments generally will not match the composition of the index. See
"Investment Objectives and Policies--Investment Policies Applicable to Both
Funds--Options on Securities and Securities Indices" and "Taxes" in the
Statement of Additional Information.
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FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE FUND,
AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. These futures contracts and related options will be on securities,
securities indices, interest rate indices and foreign currencies. A futures
contract is an agreement to purchase or sell an agreed amount of securities or
currencies at a set price for delivery in the future. A stock index futures
contract is an agreement to purchase or sell cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. The Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
The Fund may not purchase or sell futures contracts and related options
to attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to
segregation and coverage requirements of the CFTC or the SEC. If the Fund does
not hold the security or currency underlying the futures contract, the Fund will
be required to segregate on an ongoing basis with its Custodian cash or liquid
assets in an amount at least equal to the Fund's obligations with respect to
such futures contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS
DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE
MARKET AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between
movements in the price of a futures contract and the movements in the index or
price of the currencies underlying the futures contract is imperfect and there
is a risk that the value of the indices or currencies underlying the futures
contract may increase or decrease at a greater rate than the related futures
contracts resulting in losses to the Fund. Certain futures exchanges or boards
of trade have established daily limits on the amount that the price of futures
contracts or related options may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict the Fund's ability to
purchase or sell certain futures contracts or related options on any particular
day.
The Fund's ability to enter into futures contracts and options thereon
is limited by the requirements of the Internal Revenue Code for qualification as
a regulated investment company. See "Investment Objectives and Policies" and
"Taxes" in the Statement of Additional Information.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY
EXCHANGE RATES AND 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. The Fund may enter into such contracts on a spot, i.e., cash, basis
at the rate then prevailing in the currency exchange market or on a forward
basis, by entering into a forward contract to purchase or sell currency. A
forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract. These contracts are traded in the market conducted directly
between currency traders (typically large commercial banks) and their customers.
See "Investment Objectives and Policies--Investment Policies Applicable to
Prudential Active Balanced Fund--Foreign Currency Forward Contracts, Options and
Futures Transactions" in the Statement of Additional Information.
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<PAGE>
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. When the Fund
invests in foreign securities, it may enter into forward contracts in several
circumstances to protect the value of its assets. The 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. Transaction hedging
is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts which the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged. See "Investment Objectives and Policies" in the
Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY
EXCHANGE TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH
THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency and futures contracts and options on futures contracts
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and (6) the possible inability of the Fund to purchase
or sell a portfolio security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Taxes" in the
Statement of Additional Information.
The Fund will generally purchase options and futures on an exchange
only if there appears to be a liquid secondary market for such options or
futures; the Fund will generally purchase OTC options only if the investment
adviser believes that the other party to options will continue to make a market
for such options. However, there can be no assurance that a liquid secondary
market will continue to exist or that the other party will continue to make a
market. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or related option.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
THE COMPANY HAS A BOARD OF TRUSTEES WHICH, IN ADDITION TO OVERSEEING
THE ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY
BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISERS FURNISH DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended September 30, 1996, total expenses as a
percentage of average net assets were 1.00% for Class Z shares. No Class A,
Class B or Class C shares of the Fund were outstanding during this period.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY
CENTER THREE, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE COMPANY AND
IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. It was established as a New York limited liability
company in 1996. See "Manager and Subadvisers" in the Statement of Additional
Information. Prior to October 30, 1996, the manager of the Fund was Prudential
Institutional Fund Management, Inc. It was compensated for its services at an
annual rate of .70 of 1% of the Fund's average daily net assets.
As of October 31, 1996, PMF served as the manager to 40 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies with aggregate
assets of approximately $53.4 billion.
Under the Management Agreement with the Company, PMF manages the
investment operations of the Fund and also administers the Company's business
affairs. See "Manager and Subadvisers" in the Statement of Additional
Information.
SUBADVISERS
JENNISON ASSOCIATES CAPITAL CORP. (JENNISON OR THE SUBADVISER), 466
LEXINGTON AVENUE, NEW YORK, NEW YORK, 10017, IS THE SUBADVISER TO THE COMPANY.
It was incorporated in 1969 under the laws of the State of New York. As of
October 31, 1996, Jennison had over $31 billion in assets under management for
institutional and mutual fund clients.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PMF, JENNISON FURNISHES
INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND
IS COMPENSATED BY PMF FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $300 MILLION AND .25 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $300 MILLION.
Under the Subadvisory Agreement, Jennison, subject to the supervision
of PMF, is responsible for managing the assets of the Fund in accordance with
its investment objective, investment program and policies. Jennison determines
what securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
BRADLEY GOLDBERG IS THE PORTFOLIO MANAGER AND PETER REINEMANN AND G.
TODD SILVA ARE ASSOCIATE PORTFOLIO MANAGERS OF THE FUND. Mr. Goldberg is an
Executive Vice President of Jennison, and is responsible for the day-to-day
management of the Fund. Mr. Goldberg has managed the Fund since its inception in
January 1993 and has been employed as a portfolio manager at Jennison since
1974. Mr. Goldberg also serves as the portfolio manager of the Prudential
Jennison Growth & Income Fund, a series of the Prudential Jennison Series Fund,
Inc., which is a registered investment company. Mr. Reinemann, a Senior Vice
President and Director, joined Jennison in 1992 as an associate portfolio
manager. Prior to that time, he served as a Vice President at Paribas Asset
Management, Inc. Mr. Silva, a Senior Vice President of Jennison, joined Jennison
in June 1996. He was previously a Vice President and assistant portfolio manager
in the Growth & Income Group at Scudder, Stevens & Clark Inc. and an equity
analyst at Putnam Investments. Mr. Reinemann and Mr. Silva are also Associate
Portfolio Managers of the Prudential Jennison Growth & Income Fund.
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THE PRUDENTIAL INVESTMENT CORPORATION (PIC), 751 BROAD STREET, NEWARK,
NEW JERSEY 07102, INVESTS AVAILABLE CASH BALANCES FOR THE FUND THROUGH A JOINT
REPURCHASE AGREEMENT ACCOUNT. The Manager reimburses PIC for the reasonable
costs and expenses it incurs in providing such services.
PMF, Jennison and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY OWNED
SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE
CLASS B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND
UNDER RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT
(THE DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (ALSO THE DISTRIBUTOR)
INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C
SHARES. PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF WHICH IS
REIMBURSED BY OR PAID FOR BY THE FUND. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Fund is obligated to pay distribution and/or
service fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. Prudential Securities has agreed
to limit its distribution-related fees payable under the Class A Plan to .25 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending September 30, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL
SECURITIES FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND
CLASS C SHARES AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH
OF THE CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of 1%
of the average daily net assets of the Class B and Class C shares, respectively,
and (ii) a service fee of .25 of 1% of the average daily net assets of each of
the Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
Distribution expenses attributable to the sale of shares of the Fund
will be allocated to each class based upon the ratio of sales of each class to
the sales of all shares of the Fund other than expenses allocable to a
particular class. The distribution fee and sales charge of one class will not be
used to subsidize the sale of another class.
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Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Trustees of the Company, including a majority of
the Trustees who are not "interested persons" of the Company (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated at
any time by vote of a majority of the Rule 12b-1 Trustees or of a majority of
the outstanding shares of the applicable class of the Fund. The Fund will not be
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers and other persons which distribute shares of the Fund
(including Class Z shares). Such payments may be calculated by reference to the
net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the
SEC, state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the
imposition of $10,000,000 civil penalty, established a settlement fund in the
amount of $330,000,000 and procedures to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has agreed
to provide additional funds, if necessary, for the purposes of the settlement
fund. PSI's settlement with the state securities regulators included an
agreement to pay a penalty of $500,000 per jurisdiction. PSI consented to a
censure and to the payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Company is not affected by PSI's financial condition and is an
entirely separate legal entity from PSI, which has no beneficial ownership
therein and the Fund's assets which are held by State Street, an independent
custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee
and subsidize all or a portion of the operating expenses of the Fund. Fee
waivers and expense subsidies will increase the Fund's total return. See
"Performance and Yield Information" in the Statement of Additional Information
and "Fund Expenses" above.
21
<PAGE>
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission
merchant for the Fund provided that the commissions, fees or other remuneration
it receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Company.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One,
Edison, New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent
and in those capacities maintains certain books and records for the Fund. PMFS
is a wholly owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY
SUBTRACTING ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE
REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR
EACH CLASS. For valuation purposes, quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. THE TRUSTEES FIXED
THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Company's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
The Fund will compute its NAV once daily on days that the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem shares have been received by the Fund or days on which
changes in the value of the Fund's portfolio securities do not materially affect
the NAV. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. See "Net Asset Value" in the Statement
of Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, which will differ
by approximately the amount of any distribution and/or service fee expense
accrual differential among the classes.
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are
based on historical earnings and are not intended to indicate future
performance. The "total return" shows how much an investment in the Fund would
have
22
<PAGE>
increased (decreased) over a specified period of time (i.e., one, five or ten
years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing the
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance and
Yield Information" in the Statement of Additional Information. Further
performance information will be contained in the Fund's annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO
FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY,
THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized by the Fund. See "Taxes" in the Statement of Additional
Information.
In addition, under the Internal Revenue Code, special rules apply to
the treatment of certain options and futures contracts (Section 1256 contracts).
At the end of each year, such investments held by the Fund will be required to
be "marked-to-market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. See "Taxes" in the Statement of Additional Information.
Gains or losses on disposition of debt securities denominated in a
foreign currency attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
The Fund may incur foreign income taxes in connection with some of its
foreign investments.
23
<PAGE>
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions
of net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
The maximum long-term capital gains rate for individual shareholders is
currently 28% and the maximum tax rate for ordinary income is 39.6%.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that are held for six months or less, will be treated as a long-term capital
loss to the extent of any capital gain distributions received by the
shareholder.
The Fund has obtained opinions of counsel to the effect that neither
(i) the conversion of Class B shares into Class A shares nor (ii) the exchange
of Class B or Class C shares for Class A or Class Z shares or the exchange of
Class A shares for Class Z shares constitutes a taxable event for federal income
tax purposes. However, such opinions are not binding on the Internal Revenue
Service.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and
remit to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes" in the
Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND
TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL
LOSSES AT LEAST ANNUALLY. Dividends paid by the Fund with respect to each class
of shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount except
that each class will bear its own distribution and/or service fee charges,
generally resulting in lower dividends for Class B and Class C shares in
relation to Class A and Class Z shares and lower dividends for Class A shares in
relation to Class Z shares. Distribution of net capital gains, if any, will be
paid in the same amount for each class of shares. See "How the Fund Values its
Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES,
BASED ON THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE
TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
adviser to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF
THE DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND
DATE (WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE
PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR
INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
24
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
THE COMPANY WAS ESTABLISHED AS A DELAWARE BUSINESS TRUST ON MAY 11,
1992. THE COMPANY IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF
BENEFICIAL INTEREST, $.001 PAR VALUE PER SHARE, DIVIDED INTO TWO SERIES OR
PORTFOLIOS, THE FUND AND PRUDENTIAL STOCK INDEX FUND. THE FUND IS FURTHER
DIVIDED INTO FOUR CLASSES OF SHARES, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z. Prudential Stock Index Fund offers one class of shares. Each class of
beneficial interest of the Fund represents an interest in the same assets of the
Fund and is identical in all respects except that (i) each class (with the
exception of Class Z shares) is subject to different sales charges and
distribution and/or service fees, which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class of the Fund, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"How the Fund is Managed--Distributor." In accordance with the Company's
Declaration of Trust, the Trustees may authorize the creation of additional
series of beneficial interest and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
The Company's expenses generally are allocated between the Fund and
Prudential Stock Index Fund on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to the Fund or the other
series of the Company are charged to the Fund or the other series, as the case
may be.
The Trustees may increase or decrease the number of authorized shares
without the approval of shareholders. Shares of the Fund, when issued, are fully
paid, nonassessable, fully transferable and redeemable at the option of the
holder. Shares are also redeemable at the option of the Fund under certain
circumstances as described under "Shareholder Guide--How to Sell Your Shares."
Each share of each class is equal as to earnings, assets and voting privileges,
except as noted above, and each class bears the expenses related to the
distribution of its shares (with the exception of Class Z shares, which are not
subject to any distribution or service fees). Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debts and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Company's shares do not have cumulative
voting rights for the election of Trustees.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS
UNLESS OTHERWISE REQUIRED BY LAW.THE COMPANY WILL NOT BE REQUIRED TO HOLD
MEETINGS OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS
REQUIRED TO BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT.
SHAREHOLDERS HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A
VOTE OF 10% OR MORE OF THE COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF
VOTING ON THE REMOVAL OF ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
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. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
25
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES,
PRUSEC OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL
FUND SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT
SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN
PROGRAMS SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT CLASS Z SHARES. The offering price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at NAV without any sales charge. See "Alternative Purchase Plan"
below. See also "How the Fund Values its Shares."
The minimum initial investment is $1,000 per class for Class A and
Class B shares and $5,000 for Class C shares. There is no minimum initial
investment requirement for Class Z shares. The minimum subsequent investment is
$100 for all classes, except for Class Z shares for which there is no such
minimum. All minimum investment requirements are waived for certain retirement
and employee savings plans or custodial accounts for the benefit of minors. For
purchases through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a share certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the third business day following the
investment.
Transactions in Fund shares may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by
wire, you must first telephone PMFS to receive an account number at (800)
225-1852 (toll-free). The following information will be requested: your name,
address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Dryden Fund, Prudential Active Balanced Fund, specifying
on the wire the account number assigned by PMFS and your name and identifying
the sales charge alternative (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to
4:15 P.M., New York time, on a business day, you may purchase shares of the Fund
as of that day.
In making a subsequent purchase order by wire, you should wire State
Street directly and should be sure that the wire specifies Prudential Dryden
Fund, Prudential Active Balanced Fund, Class A, Class B, Class C or Class Z
shares and your name and individual account number. It is not necessary to call
PMFS to make subsequent purchase orders utilizing federal funds. The minimum
amount which may be invested by wire is $1,000.
26
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------- -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another class
of the amount invested or the
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio
of investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund
will receive different compensation for selling Class A, Class B, Class C and
Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 7 years
and do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC
27
<PAGE>
of 5% which declines to zero over a 6-year period, you should consider
purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be
more advantageous for you to purchase Class A shares over either Class B or
Class C shares regardless of how long you intend to hold your investment.
However, unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at the
time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and
you purchase Class B or Class C shares, you would have to hold your investment
for more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE
INVESTMENT OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR
CLASS A SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
-------------- --------------- --------------
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment
of an initial sales charge), the Manager, the Distributor or one of their
affiliates will pay dealers, financial advisers and other persons which
distribute shares a finders' fee based on a percentage of the net asset value of
shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges
are available through Rights of Accumulation and Letters of Intent. Shares of
the Fund and shares of other Prudential Mutual Funds (excluding money
28
<PAGE>
market funds other than those acquired pursuant to the exchange privilege) may
be aggregated to determine the applicable reduction. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment
of an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the plan has existing
assets of at least $1 million invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) or 250 eligible employees or participants. In the case of Benefit
Plans whose accounts are held directly with the Transfer Agent or Prudential
Securities and for which the Transfer Agent or Prudential Securities does
individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain retirement and deferred compensation plans, qualified or non-qualified
under the Internal Revenue Code, including pension, profit-sharing, stock-bonus
or other employee benefit plans under Section 401 of the Internal Revenue Code
and deferred compensation and annuity plans under Sections 457 or 403(b)(7) of
the Internal Revenue Code that participate in the Prudential's PruArray and
SmartPath Programs (benefit plan recordkeeping services) (hereafter referred to
as a PruArray or SmartPath Plan); provided that the plan has at least $1 million
in existing assets or 250 eligible employees or participants. The term "existing
assets" for this purpose includes stock issued by a PruArray or SmartPath Plan
sponsor, shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include shares of money market funds acquired by exchange from a Participating
Fund.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money
market fund or other no-load fund which imposes a distribution or service fee of
.25 of 1% or less) and (iii) the financial adviser served as the client's broker
on the previous purchase.
You must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
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CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing
one of the deferred sales charge alternatives is the NAV next determined
following receipt of an order by the Transfer Agent, Prudential Securities or
Prusec. Although there is no sales charge imposed at the time of purchase,
redemption of Class B and Class C shares may be subject to a CDSC. See "How to
Sell Your Shares--Contingent Deferred Sales Charges." The Distributor will pay
sales commissions of up to 4% of the purchase price of Class B shares to
dealers, financial advisers and other persons who sell Class B shares at the
time of sale from its own resources. This facilitates the ability of the Fund to
sell the Class B shares without an initial sales charge being deducted at the
time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor." In connection with
the sale of Class C shares, the Distributor will pay dealers, financial advisers
and other persons which distribute Class C shares a sales commission of up to 1%
of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are available for purchase by (i) pension, profit
sharing or other employee benefit plans qualified under Section 401 of the
Internal Revenue Code, deferred compensation and annuity plans under Sections
457 and 403(b)(7) of the Internal Revenue Code, and non-qualified plans for
which the Fund is an available option (collectively, Benefit Plans), provided
such Benefit Plans (in combination with other plans sponsored by the same
employer or group of related employers) have at least $50 million in defined
contribution assets; (ii) participants in any fee-based program sponsored by
Prudential Securities (or one of its affiliates) which includes mutual funds as
investment options and for which the Fund is an available option; and (iii)
investors who were, or have executed a letter of intent to become, shareholders
of any series of the Company on or before one or more series of Company
reorganized or who on that date had investments in certain products for which
the Company provided exchangeability. After a Benefit Plan qualifies to purchase
Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the
Distributor or one of their affiliates may pay dealers, financial advisers and
other persons which distribute shares a finders' fee based on a percentage of
the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER
SHARE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS
SHARES." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge (CDSC), as described
below. See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
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If the proceeds of the redemption (a) exceed $50,000, (b) are to be
paid to a person other than the record owner, (c) are to be sent to an address
other than the address on the Transfer Agent's records, or (d) are to be paid to
a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Prudential Preferred
Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK
WITHIN SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED
UNTIL THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK
HAS BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE
PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING
SHARES BY WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Company has, however, elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during the 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
any such shareholder 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal income tax treatment of any gain realized upon redemption. However,
if the redemption was made within a 30 day period of the repurchase and if the
redemption results in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes.
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CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
purchased through reinvestment of dividends or distributions are not subject to
CDSC. The amount of any CDSC will be paid to and retained by the Distributor.
See "How the Fund is Managed--Distributor" and "Waiver of Contingent Deferred
Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------ -------------------
First .............................. 5.0%
Second ............................. 4.0%
Third .............................. 3.0%
Fourth ............................. 2.0%
Fifth .............................. 1.0%
Sixth .............................. 1.0%
Seventh ............................ None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results generally in the lowest
possible rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value
above the total amount of payments for the purchase of Fund shares made during
the preceding six years; then of amounts representing the cost of shares held
beyond the applicable CDSC period; and finally, of amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share
for a cost of $1,000. Subsequently, you acquired 5 additional Class B shares
through dividend reinvestment. During the second year after the purchase, you
decided to redeem $500 of your investment. Assuming at the time of the
redemption the NAV had appreciated to $12 per share, the value of your Class B
shares would be $1,260 (105 shares at $12 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds
($500 minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
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disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination or disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial
redemption in connection with certain distributions made without penalty under
the Internal Revenue Code from a tax-deferred retirement plan, an IRA or Section
403(b) custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Trustee of the Fund.
You must notify the Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any additional
sales charge.
Since the Fund tracks amounts paid rather than the number of shares
bought on each purchase of Class B shares, the number of Class B shares eligible
to convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares then in your account. Each time any Eligible Shares in
your account convert to Class A shares, all shares or amounts representing Class
B shares then in your account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares.
For purposes of determining the number of Eligible Shares, if the Class
B shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
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Since annual distribution-related fees are lower for Class A shares
than Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for
conversions, all payments for Class B shares during a month will be deemed to
have been made on the last day of the month, or for Class B shares acquired
through exchange, or a series of exchanges, on the last day of the month in
which the original payment for purchases of such Class B shares was made. For
Class B shares previously exchanged for shares of a money market fund, the time
period during which such shares were held in the money market fund will be
excluded. For example, Class B shares held in a money market fund for one year
will not convert to Class A shares until approximately eight years from
purchase. For purposes of measuring the time period during which shares are held
in a money market fund, exchanges will be deemed to have been made on the last
day of the month. Class B shares acquired through exchange will convert to Class
A shares after expiration of the conversion period applicable to the original
purchase of such shares.
The conversion feature is subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH THE
OTHER SERIES OF THE COMPANY AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING
ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY BE
EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF
ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed
at the time of exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be that imposed by the fund in which shares are initially
purchased and will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE PROCEDURES.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order.The exchange privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
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IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN
ON THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual
Fund Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE
EXCHANGE OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES
BY MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS
NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available
for shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an
available option will have their Class A shares, if any, exchanged for Class Z
shares when they join the program. Upon leaving the program (whether voluntarily
or not), such Class Z shares (and, to the extent provided for in the program,
Class Z shares acquired through participation in the program) will be exchanged
for Class A shares at net asset value. Similarly, participants in PSI's 401(k)
Plan for which the Fund's Class Z shares is an available option and who wish to
transfer their Class Z shares out of the PSI 401(k) Plan following separation
from service (i.e., voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including
exchanges (and market timing transactions) which are of a size and/or frequency
engaged in by one or more accounts acting in concert or otherwise, that have or
may have an adverse effect on the ability of the Subadviser to manage the
portfolio. The determination that such exchanges or activity may have an adverse
effect and the determination to reject any exchange order shall be in the
discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund,
you can take advantage of the following additional services and privileges:
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION WITHOUT A
SALES CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have
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subsequent dividends and/or distributions sent in cash rather than reinvested.
If you hold shares through Prudential Securities, you should contact your
financial adviser.
o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec registered representative
or the Transfer Agent directly.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
to shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.
o REPORTS TO SHAREHOLDERS. The Fund will send you annual and
semi-annual reports. The financial statements appearing in annual reports are
audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges
described above, see "Shareholder Investment Account" in the Statement of
Additional Information.
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- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fundat
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- --------------------------------------------------------------------------------
- -----------------------------------------
TAXABLE BOND FUNDS
- -----------------------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
- -----------------------------------------
TAX-EXEMPT BOND FUNDS
- -----------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
- -----------------------------------------
GLOBAL FUNDS
- -----------------------------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
- -----------------------------------------
EQUITY FUNDS
- -----------------------------------------
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- -----------------------------------------
MONEY MARKET FUNDS
- -----------------------------------------
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
A-1
<PAGE>
[This page intentionally left blank]
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
PAGE
FUND HIGHLIGHTS ....................................... 2
Risk Factors and Special Characteristics ............. 2
FUND EXPENSES ......................................... 5
FINANCIAL HIGHLIGHTS .................................. 6
HOW THE FUND INVESTS .................................. 7
Investment Objective and Policies .................... 7
Other Investments and Policies ....................... 12
Risk Factors and Special Considerations of
Investing in Foreign Securities ..................... 14
Risk Factors Relating to Investing in Debt
Securities Rated Below Investment Grade
(Junk Bonds) ........................................ 14
Hedging and Return Enhancement Strategies ............ 15
Investment Restrictions .............................. 18
HOW THE FUND IS MANAGED ............................... 19
Manager .............................................. 19
Subadvisers .......................................... 19
Distributor .......................................... 20
Fee Waivers and Subsidy .............................. 21
Portfolio Transactions ............................... 22
Custodian and Transfer and
Dividend Disbursing Agent ........................... 22
HOW THE FUND VALUES ITS SHARES ........................ 22
HOW THE FUND CALCULATES PERFORMANCE ................... 22
TAXES, DIVIDENDS AND DISTRIBUTIONS .................... 23
GENERAL INFORMATION ................................... 25
Description of Shares ................................ 25
Additional Information ............................... 25
SHAREHOLDER GUIDE ..................................... 26
How to Buy Shares of the Fund ........................ 26
Alternative Purchase Plan ............................ 27
How to Sell Your Shares .............................. 30
Conversion Feature--Class B Shares ................... 33
How to Exchange Your Shares .......................... 34
Shareholder Services ................................. 35
THE PRUDENTIAL MUTUAL FUND FAMILY ..................... A-1
================================================================================
MF174A-1
- --------------------------------------------------------------------------------
Class A: 74431F506
CUSIP Nos.: Class B: 74431F605
Class C: 74431F704
Class Z: 74431F803
- --------------------------------------------------------------------------------
Prudential
Active
Balanced
Fund
P R O S P E C T U S
NOVEMBER 29, 1996
[LOGO] Prudential
Investments
<PAGE>
Prudential Stock Index Fund
- --------------------------------------------------------------------------------
PROSPECTUS DATED JUNE 18, 1997
- --------------------------------------------------------------------------------
Prudential Stock Index Fund (the Fund) is a series of Prudential Dryden Fund
(formerly The Prudential Institutional Fund) (the Company), a diversified,
open-end, management investment company. The Fund's investment objective is to
seek to provide investment results that correspond to the price and yield
performance of the Standard & Poor's 500 Composite Stock Price Index. There can
be no assurance that the Fund's investment objective will be achieved. See "How
the Fund Invests--Investment Objective and Policies." The Fund's address is
Gateway Center Three, Newark, New Jersey 07102-4077, and its telephone number is
(800) 225-1852.
This Prospectus sets forth concisely the information about the
Fund that a prospective investor should know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated June 18, 1997, which
information is incorporated herein by reference (is legally considered a part of
this Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
- --------------------------------------------------------------------------------
WHAT IS PRUDENTIAL STOCK INDEX FUND?
Prudential Stock Index Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Company is a diversified, open-end,
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek 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). There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 6.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund's performance will not 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. Potential tracking differences, brokerage and other
transaction costs and other Fund expenses may cause the Fund's return to be
lower than the return of the S&P 500 Index. See "How the Fund
Invests--Investment Objective and Policies" at page 6.
The Fund may engage in various hedging and return enhancement strategies
and use derivatives. See "How the Fund Invests--Hedging and Return Enhancement
Strategies--Risks of Hedging and Return Enhancement Strategies" at page 11. As
with an investment in any mutual fund, an investment in this Fund can decrease
in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
manager of the Company and is compensated for its services at an annual rate of
.30 of 1% of average daily net assets of the Fund. As of May 31, 1997, PIFM
served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $56 billion. The Prudential
Investment Corporation, which does business under the name of Prudential
Investments (PI, the Subadviser or the investment adviser), furnishes investment
advisory services in connection with the management of the Fund under a
Subadvisory Agreement with PIFM. See "How the Fund is Managed--Manager" at page
12 and "How the Fund is Managed--Subadviser" at page 12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's shares. Prudential Securities incurs the expense of
distributing the Fund's shares under a Distribution Agreement with the Company,
none of which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 13.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE MINIMUM INVESTMENT?
There is no minimum initial or subsequent investment requirement for
investors who qualify to purchase shares. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 17 and "Shareholder Guide--Shareholder Services" at
page 21.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities. Class Z shares of the Fund
are offered to (i) investors who purchase $1 million or more of shares of the
Fund (or who already own $1 million of shares of other Prudential Mutual Funds)
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option, (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by The Prudential Insurance Company of
America (Prudential), for whom Class Z shares of the Prudential Mutual Funds are
an available investment option, (iv) Benefit Plans for which Prudential
Retirement Services serves as record keeper and as of September 20, 1996 (a)
were Class Z shareholders of the Prudential Mutual Funds or (b) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual Funds, (v)
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), and (vi) employees of Prudential and/or Prudential Securities who
participate in a Prudential-sponsored employee savings plan. Class I shares are
offered to pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Sections 457 or 403(b)(7) of the Internal Revenue Code,
provided that a plan has at least $150 million in defined contribution assets
and at least $50 million of such assets are invested in Prudential Mutual Funds
and annuities products. Participants in programs sponsored by Prudential
Retirement Services should contact their client representative for more
information about purchasing shares of the Fund. See "How the Fund Values its
Shares" at page 14 and "Shareholder Guide--How to Buy Shares of the Fund" at
page 17.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers two classes of shares, Class Z and Class I shares, that are
sold without an initial or contingent deferred sales charge to a limited group
of investors. Class I shares must be held in an omnibus account and are subject
to nominal transfer agency fees or expenses. Shares of the Fund are not subject
to any ongoing service- or distribution-related expenses.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
shares. See "Shareholder Guide--How to Sell Your Shares" at page 19.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 15.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases .......................... None
Maximum Deferred Sales Load ...................................... None
Maximum Sales Load Imposed on Reinvested Dividends ............... None
Redemption Fees .................................................. None
Exchange Fee ..................................................... None
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
CLASS Z CLASS I
SHARES SHARES
------ -------
Management Fees .............................................. .30% .30%
12b-1 Fees ................................................... None None
Other Expenses (After Reimbursement) ......................... .10% .00%
--- ---
Total Fund Operating Expenses (After Reimbursement) .......... .40% .30%
=== ===
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
Class Z ..................................... $4 $13 $22 $51
Class I ..................................... $3 $10 $17 $38
The above example is based on expenses expected to be incurred during the
current fiscal year as reduced by the Manager's expense reimbursement. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various types of costs and expenses that an investor in the Fund will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses" includes
estimated operating expenses of the Fund for the fiscal year ending September
30, 1997, such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian fees.
* The Manager has agreed to reimburse the Fund so that Total Fund Operating
Expenses do not exceed .40% and .30%, respectively, for Class Z and Class I
shares of the Fund. Total Fund Operating Expenses before reimbursement are
estimated to be .48% and .38%, respectively, of the average net assets of
Class Z and Class I shares of the Fund.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
- --------------------------------------------------------------------------------
The following financial highlights for the period ended March 31, 1997 are
unaudited. The financial highlights for periods prior to the six months ended
March 31, 1997 have been audited by Deloitte & Touche LLP, independent auditors,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class Z share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders." During these periods, there were no Class
I shares outstanding.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z SHARES
----------------------------------------------------------
NOVEMBER 5,
SIX MONTHS YEAR ENDED 1992(A)
ENDED SEPTEMBER 30, THROUGH
MARCH 31, -------------------------------- SEPTEMBER
1997* 1996 1995 1994 30,1993
---------- --------- ------- ------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . $ 16.06 $ 14.22 $ 11.27 $ 11.12 $ 10.00
INCOME FROM INVESTMENT OPERATIONS: -------- -------- -------- ------- -------
Net investment income(b) ............. .14 .25 .23 .26 .23
Net realized and unrealized gain
on investment transactions .......... 1.57 2.44 2.97 .11 .94
-------- -------- -------- ------- -------
Total from investment operations .... 1.71 2.69 3.20 .37 1.17
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income . (.26) (.28) (.22) (.18) (.05)
Distributions from net realized gains (.15) (.57) (.03) (.04) --
-------- -------- -------- ------- -------
Total distributions ................. (.41) (.85) (.25) (.22) (.05)
-------- -------- -------- ------- -------
Net asset value, end of period ....... $ 17.36 $ 16.06 $ 14.22 $ 11.27 $ 11.12
======== ======== ======== ======= =======
TOTAL RETURN(D): ..................... 10.65% 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ...... $256,207 $184,379 $101,945 $50,119 $27,142
Average net assets (000) ............. $224,665 $142,540 $ 71,711 $38,098 $18,807
Ratios to average net assets(b):
Expenses ............................ .52%(c) .60% .60% .60% .60%(c)
Net investment income ............... 1.73%(c) 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate .............. 1% 2% 11% 2% 1%
Average commission rate paid per share $ 0.0250 $ 0.0250 N/A N/A N/A
</TABLE>
- ----------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and other distributions. Total return for
periods of less than a full year are not annualized. Total return includes
the effect of expense subsidies.
N/A-Data not required for these periods.
* Effective October 30, 1996, PIFM succeeded Prudential Institutional Fund
Management, Inc. as manager of the Fund.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO PROVIDE INVESTMENT RESULTS
THAT CORRESPOND TO THE PRICE AND YIELD PERFORMANCE OF THE S&P 500 INDEX. THERE
CAN BE NO ASSURANCE THAT THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment
Objectives and Policies--Investment Policies Applicable to Prudential Stock
Index Fund" in the Statement of Additional Information.
The Fund seeks to provide investment results that correspond to the price
and yield performance of the S&P 500 Index. The S&P 500 Index is an unmanaged,
market-weighted index of 500 stocks selected by Standard & Poor's Corporation
(S&P) 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
S&P 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's(R)",
"S&P(R)", "S&P 500(R)", "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 (Prudential) 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 "Investment Objectives
and Policies--Investment Policies Applicable to Prudential Stock Index Fund" in
the Statement of Additional Information regarding certain additional disclaimers
and limitations of liability on behalf of S&P.
The Fund is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Instead,
PI, the investment adviser for the Fund, using a "passive" or indexing approach,
will attempt to approximate the investment performance of the S&P 500 Index by
purchasing equity securities that as a group reflect the price and yield
performance of the S&P 500 Index. The Fund intends to purchase a statistically
selected sample of the 500 stocks included in the S&P 500 Index in approximately
the same proportions as they are represented in the S&P 500 Index. In addition,
from time to time adjustments may be made in the Fund's holdings due to factors
which may include changes in the composition of the S&P 500 Index or receipt of
distributions of securities of companies spun off from S&P 500 companies.
PI believes that this investment approach will provide an effective method
of tracking the performance of the S&P 500 Index. Nevertheless, PI 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. PI 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 that of the S&P 500
Index). Tracking will be monitored at least on a monthly 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 its total assets will be invested in
securities included in the S&P 500 Index in the same proportions as that of the
Index. The Fund may invest the balance of its assets in: (i) equity-related
securities; (ii) obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities; (iii) put and call options on securities and
stock indices; and (iv) futures contracts on stock indices and options thereon.
6
<PAGE>
Options, futures contracts, and options on futures contracts are used, if
at all, primarily to invest uncommitted cash balances, to maintain liquidity to
meet redemptions, to facilitate tracking, to reduce transaction costs or to
hedge the Fund's portfolio.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement purposes, the Fund may also
(i) enter into repurchase agreements, when-issued, delayed delivery and forward
commitment transactions; and (ii) lend its portfolio securities.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND THEREFORE MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940
(THE INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT FUNDAMENTAL MAY
BE MODIFIED BY THE BOARD OF TRUSTEES OF THE COMPANY (TRUSTEES).
EQUITY AND EQUITY-RELATED SECURITIES
THE FUND INVESTS PRIMARILY IN EQUITY SECURITIES AND THE VALUE OF THE FUND'S
INVESTMENTS WILL GO UP AND DOWN WITH THE PERFORMANCE OF THE STOCKS IN THE S&P
500 INDEX.
The Fund may invest in equity-related securities. Equity-related securities
are common stocks, preferred stocks, rights, warrants and debt securities or
preferred stocks which are convertible or exchangeable for common stocks or
preferred stocks. See "Investment Objectives and Policies--Investment Policies
Applicable to Each of the Funds--Convertible Securities, Warrants and Rights" in
the Statement of Additional Information.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest a portion of its assets in equity securities of foreign
issuers denominated in U.S. currency.
FOREIGN SECURITIES INVOLVE CERTAIN RISKS WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR ECONOMIC
INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF PREDICTING
INTERNATIONAL TRADE PATTERNS AND THE POSSIBILITY OF IMPOSITION OF EXCHANGE
CONTROLS. Foreign 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 instrumentalities or agencies. 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 reporting standards comparable to those applicable to
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.
The Fund may purchase American Depositary Receipts (ADRs), which 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 U.S. bank and traded on a U.S. 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.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some
7
<PAGE>
are supported only by the credit of the issuing agency. See "Investment
Objectives and Policies--Investment Policies Applicable to Each of the
Funds--U.S. Government Securities" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated. Money market instruments typically have a maturity of one year or
less as measured from the date of purchase. The Fund may invest in money market
instruments without limit for temporary defensive purposes. To the extent the
Fund otherwise invests in money market instruments, it is subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks to take advantage of
investment opportunities, for temporary, extraordinary or emergency purposes or
for the clearance of transactions. The Fund may pledge up to 20% of its total
assets to secure these borrowings. If the Fund's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings. If
the Fund borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities purchased
fails to cover their cost (including any interest paid on the money borrowed) to
the Fund, the net asset value of the Fund's shares will decrease faster than
would otherwise be the case. This is the speculative factor known as "leverage."
See "Investment Objectives and Policies--Investment Policies Applicable to Each
of the Funds--Borrowing" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. See "Investment Objectives and
Policies--Investment Policies Applicable to Each of the Funds--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the applicable notice
period.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss. The Fund may participate in a joint repurchase account
managed by PI. See "Investment Objectives and Policies--Investment Policies
Applicable to Each of the Funds--Repurchase Agreements" in the Statement of
Additional Information.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on a
when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash or liquid
assets having a value equal to or greater than the Fund's purchase commitments.
Subject to this requirement, the Fund may purchase securities on such basis
without limit. See "Investment Objectives and Policies--Investment Policies
Applicable to Each of the Funds--When-Issued and Delayed Delivery Securities" in
the Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As with any
extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. As a matter of fundamental policy, the Fund cannot lend more than
30% of the value of its total assets. See "Investment Objectives and
Policies--Investment Policies Applicable to Each of the Funds--Securities
Lending" in the Statement of Additional Information. The Fund may pay reasonable
administration and custodial fees in connection with a loan.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. THE FUND, AND THUS
THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. These strategies currently include the use of derivatives, such as
options, futures contracts and options thereon. The Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objectives and Policies" and "Taxes" in the Statement
of Additional Information. PI does not intend to buy all of these instruments or
use all of these strategies to the full extent permitted unless it believes that
doing so will help the Fund achieve its objective. New financial products and
risk management techniques continue to be developed and the Fund may use these
new investments and techniques to the extent consistent with its investment
objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON ANY
SECURITY IN WHICH IT MAY INVEST OR OPTIONS ON ANY SECURITIES INDEX. THESE
OPTIONS ARE TRADED ON U.S. EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO HEDGE
ITS PORTFOLIO. The Fund may write covered put and call options to generate
additional income through the receipt of premiums and purchase call options in
an effort to protect against an increase in the price of securities it intends
to purchase. The Fund may also purchase put and call options to offset
previously written put and call options of the same series. See "Investment
Objectives and Policies--Investment Policies Applicable to Each of the
Funds--Options on Securities and Securities Indices" in the Statement of
Additional Information.
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A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR SECURITIES IN
THE INDEX SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR
STRIKE PRICE). The writer of a call option, in return for the premium, has the
obligation, upon exercise of the option, to deliver, depending upon the terms of
the option contract, the underlying securities or a specified amount of cash to
the purchaser upon receipt of the exercise price. When the Fund writes a call
option, it gives up the potential for gain on the underlying securities or in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash or other liquid assets in an amount equal to or greater than its obligation
under the option. Under the first circumstance, the Fund's losses are limited
because it owns the underlying security under the second circumstance, in the
case of a written call option, the Fund's losses are potentially unlimited. See
"Investment Objectives and Policies--Investment Policies Applicable to Each of
the Funds--Options on Securities and Securities Indices" in the Statement of
Additional Information.
The Fund may also write a call option, which can serve as a limited short
hedge because decreases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value.
The Fund may purchase and sell put and call options on securities indices.
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. When
purchasing or selling securities index options, the Fund is subject to the risk
that the value of its portfolio securities may not change as much as or more
than the index because the Fund's investments generally will not match the
composition of the index. See "Investment Objectives and Policies--Investment
Policies Applicable to Each of the Funds--Options on Securities and Securities
Indices" and "Taxes" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE FUND,
AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. These futures contracts and related options will be on securities
indices. A futures contract is an agreement to purchase or sell an agreed amount
of securities at a set price for delivery in the future. A stock index futures
contract is an agreement to purchase or sell cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. The Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
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<PAGE>
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments).
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold the
security underlying the futures contract, the Fund will be required to segregate
on an ongoing basis with its Custodian cash or liquid assets in an amount at
least equal to the Fund's obligations with respect to such futures contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index is imperfect and
there is a risk that the value of the indices underlying the futures contract
may increase or decrease at a greater rate than the related futures contracts
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of futures contracts
or related options may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or related options on any particular day.
The Fund's ability to enter into or close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company. See "Investment Objectives and
Policies" and "Taxes" in the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF
THESE STRATEGIES. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. Risks inherent in the use of options,
futures contracts and options on futures contracts include (1) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (2) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (3) the possible absence of a liquid secondary
market for any particular instrument at any time; (4) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (5)
the possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. See "Taxes" in the Statement of Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if the investment adviser believes
that the other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or related option.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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<PAGE>
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HOW THE FUND IS MANAGED
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THE COMPANY HAS A BOARD OF TRUSTEES WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON MATTERS
OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended September 30, 1996, total expenses as a
percentage of average net assets were .60% for Class Z shares.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE COMPANY AND
IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. PIFM was established as a New York limited liability
company in 1996. See "Manager and Subadvisers" in the Statement of Additional
Information. Prior to October 30, 1996, the manager of the Fund was Prudential
Institutional Fund Management, Inc. It was compensated for its services at an
annual rate of .40 of 1% of the Fund's average daily net assets.
As of May 31, 1997, PIFM served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $56 billion.
Under the Management Agreement with the Company, PIFM manages the
investment operations of the Fund and also administers the Company's business
affairs. See "Manager and Subadvisers" in the Statement of Additional
Information.
SUBADVISER
THE PRUDENTIAL INVESTMENT CORPORATION (PIC), 751 BROAD STREET, NEWARK, NEW
JERSEY 07102, SERVES AS SUBADVISER TO THE FUND.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PIFM, PIC, DOING BUSINESS AS
PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER OR THE INVESTMENT ADVISER), FURNISHES
INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE COMPANY
AND IS REIMBURSED FOR ALL REASONABLE COSTS AND EXPENSES INCURRED BY PI.
Under the Subadvisory Agreement, PI, subject to the supervision of PIFM, is
responsible for managing the assets of the Fund in accordance with its
investment objective, investment program and policies. PI determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
Prudential Investments Quantitative Investment Management, a unit of PI, is
responsible for the day-to-day management of the Fund and employs a team
approach to the management of the Fund.
PIFM and PIC are wholly owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
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<PAGE>
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF THE
FUND. IT IS AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER A DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL
SECURITIES (ALSO THE DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S
SHARES, NONE OF WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These expenses
include commissions and account servicing fees paid to, or on account of,
financial advisers of Prudential Securities and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The Manager (or one of its affiliates) may make payments from its own
resources to dealers (including Prudential Securities) and other persons which
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (NASD) to resolve allegations that from
1980 through 1990 PSI sold certain limited partnership interests in violation of
securities laws to persons for whom such securities were not suitable and
misrepresented the safety, potential returns and liquidity of these investments.
Without admitting or denying the allegations asserted against it, PSI consented
to the entry of an SEC Administrative Order which stated that PSI's conduct
violated the federal securities laws, directed PSI to cease and desist from
violating the federal securities laws, pay civil penalties, and adopt certain
remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purposes of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Company is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
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<PAGE>
FEE WAIVERS AND SUBSIDY
For the fiscal year ending September 30, 1997, PIFM has agreed to subsidize
the Fund's operating expenses so that total fund operating expenses do not
exceed .40% and .30% on an annualized basis of the average net assets for Class
Z and Class I shares, respectively. Thereafter, PIFM may from time to time waive
all or a portion of its management fee and subsidize all or a portion of the
operating expenses of the Fund. Fee waivers and expense subsidies will increase
the Fund's total return. See "Performance and Yield Information" in the
Statement of Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Company.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
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THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES FIXED THE SPECIFIC TIME OF DAY FOR
THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Company's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
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HOW THE FUND CALCULATES PERFORMANCE
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FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. These figures are based on historical
earnings and are not intended to indicate future performance. The "total return"
shows how much an investment in the
14
<PAGE>
Fund would have increased (decreased) over a specified period of time (i.e.,
one, five or ten years or since inception of the Fund) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. The "aggregate" total
return reflects actual performance over a stated period of time. "Average
annual" total return is a hypothetical rate of return that, if achieved
annually, would have produced the same aggregate total return if performance had
been constant over the entire period. "Average annual" total return smooths out
variations in performance. Neither "average annual" total return nor "aggregate"
total return takes into account any federal or state income taxes which may be
payable upon redemption. The "yield" refers to the income generated by an
investment in the Fund over a one-month or 30-day period. This income is then
"annualized;" that is, the amount of income generated by the investment during
that 30-day period is assumed to be generated each 30-day period for twelve
periods and is shown as a percentage of the investment. The income earned on the
investment is also assumed to be reinvested at the end of the sixth 30-day
period. The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., and other industry publications, business periodicals and market indices.
See "Performance and Yield Information" in the Statement of Additional
Information. Further performance information will be contained in the Fund's
annual and semi-annual reports to shareholders, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO
FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY,
THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts). At
the end of each year, such investments held by the Fund will be required to be
"marked to-market" for federal income tax purposes; that is, treated as having
been sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
The maximum long-term capital gains rate for individual shareholders is
currently 28% and the maximum tax rate for ordinary income is 39.6%.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that are held for six months or less, will be treated as a long-term capital
loss to the extent of any capital gain distributions received by the
shareholder.
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<PAGE>
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND TO
MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL
LOSSES AT LEAST ANNUALLY. SEE "HOW THE FUND VALUES ITS SHARES."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV ON THE RECORD DATE OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE,
UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR
TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such
election should be submitted to Prudential Mutual Fund Services LLC, Attn:
Account Maintenance Unit, P.O. Box 15015, New Brunswick, New Jersey 08906-5015.
The Fund will notify each shareholder after the close of the Fund's taxable year
both of the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
(WHICH GENERALLY OCCURS TWO BUSINESS DAYS PRIOR TO THE RECORD DATE), THE PRICE
YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR
INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
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GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
THE COMPANY WAS ESTABLISHED AS A DELAWARE BUSINESS TRUST ON MAY 11, 1992.
THE COMPANY IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF BENEFICIAL
INTEREST, $.001 PAR VALUE PER SHARE, DIVIDED INTO THE FOLLOWING SIX SERIES OR
PORTFOLIOS: THE FUND, PRUDENTIAL SMALL-CAP INDEX FUND, PRUDENTIAL BOND MARKET
INDEX FUND, PRUDENTIAL PACIFIC INDEX FUND, PRUDENTIAL EUROPE INDEX FUND AND
PRUDENTIAL ACTIVE BALANCED FUND. Shares of Prudential Small-Cap Index Fund,
Prudential Bond Market Index Fund, Prudential Pacific Index Fund and Prudential
Europe Index Fund are offered through a single separate prospectus. Shares of
Prudential Active Balanced Fund are also offered through a separate prospectus.
Each index fund, other than the Fund, offers one class of shares. The Fund
offers two classes of shares. Prudential Active Balanced Fund offers four
classes of shares. In accordance with the Company's Declaration of Trust, the
Trustees may authorize the creation of additional series of beneficial interest
and classes within such series, with such preferences, privileges, limitations
and voting and dividend rights as the Trustees may determine.
16
<PAGE>
The Company's expenses generally are allocated between the Fund and the
other series of the Company on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to a particular series or
class of a series of the Company are charged to that series or class, as the
case may be.
The Trustees may increase or decrease the number of authorized shares
without the approval of shareholders. Shares of the Fund, when issued, are fully
paid, nonassessable, fully transferable and redeemable at the option of the
holder. The Company's shares do not have cumulative voting rights for the
election of Trustees.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR MORE
OF THE COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF
ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
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. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS
SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT PURCHASING SHARES OF THE FUND. The
offering price is the NAV next determined following receipt of an order in
proper form by the Transfer Agent or Prudential Securities. Payment may be made
by wire, check or through your brokerage account. Class I shares of the Fund are
to be offered to a limited group of investors at net asset value without any
sales charge commencing on or about July 31, 1997. See "How the Fund Values its
Shares."
There is no minimum or subsequent investment requirement for shares of the
Fund. See "Shareholder Services."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a share certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
17
<PAGE>
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
ELIGIBLE PURCHASERS
Class Z shares of the Fund are available for purchase by (i) investors who
purchase $1 million or more of shares (or who already own $1 million of shares
of other Prudential Mutual Funds), including those described under "Benefit
Plans" and "Prudential Retirement Programs" below, (ii) participants in any
fee-based program or trust program sponsored by Prudential Securities, The
Prudential Savings Bank, F.S.B. (or any affiliate) which includes mutual funds
as investment options and for which the Fund is an available option, (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential, for whom Class Z shares of the Prudential Mutual Funds
are an available investment option, (iv) Benefit Plans (as defined below) for
which Prudential Retirement Services serves as record keeper and as of September
20, 1996 (a) were Class Z shareholders of the Prudential Mutual Funds or (b)
executed a letter of intent to purchase Class Z shares of the Prudential Mutual
Funds, (v) current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund), and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
Class I shares of the Fund are available for purchase by pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 or 403(b)(7) of the Internal Revenue Code (collectively, Benefit
Plans), provided that the Benefit Plan has at least $150 million in defined
contribution assets and at least $50 million of such assets are invested in
Prudential Mutual Funds and/or annuities products.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates will pay dealers, financial advisers and other persons that
distribute shares a finders' fee from its own resources based on a percentage of
the net asset value of shares sold by such persons.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Dryden Fund, Prudential Stock Index Fund, specifying on the wire the
account number assigned by PMFS and your name.
If you arrange for receipt by State Street of federal funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Dryden Fund,
Prudential Stock Index Fund, and your name and individual account number. It is
not necessary to call PMFS to make subsequent purchase orders utilizing federal
funds. The minimum amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN. The Fund offers two classes of shares, Class Z
and Class I shares (Alternative Purchase Plan). Class Z and Class I shares
represent an interest in the same portfolio of investments of the Fund and have
the same rights and obligations, except that (i) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class; and (ii) Class I shares, which are held in a single omnibus
account, are subject to nominal transfer agency fees and expenses. The two
classes also have separate exchange privileges. See "How to Exchange Your
Shares" below.
18
<PAGE>
RIGHT OF ACCUMULATION. Shares of the Fund and shares of other Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant to
the exchange privilege) may be aggregated to determine eligibility. See
"Purchase and Redemption of Fund Shares" in the Statement of Additional
Information.
BENEFIT PLANS. Class Z shares of the Fund may be purchased by a Benefit
Plan, provided that the Benefit Plan has existing assets of at least $1 million
invested in shares of Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) or 250 eligible
employees or participants. In the case of Benefit Plans whose accounts are held
directly with the Transfer Agent or Prudential Securities and for which the
Transfer Agent or Prudential Securities does individual account recordkeeping
(Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its
subsidiaries (PSI or Subsidiary Prototype Benefit Plans), shares may be
purchased by participants who are repaying loans made from such plans to the
participant.
PRUDENTIAL RETIREMENT PROGRAMS. Shares of the Fund may be purchased by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and Plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing assets" as
used herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of the Stable Value
Fund (SVF), an unaffiliated bank collective fund. Shares of the Fund may also be
purchased by plans that have monies invested in GIA and SVF, provided (i) the
purchase is made with the proceeds of a redemption from either GIA or SVF and
(ii) shares of the Fund are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class Z shares are also offered to
Benefit Plans sponsored by employers which are members of a common trade,
professional or membership association (Association) that participate in the
PruArray Program provided that the Association enters into a written agreement
with Prudential. Such Benefit Plans may purchase shares of the Fund without
regard to the assets or number of participants in the individual employer's
qualified Plan(s) so long as the employers in the Association (i) have
retirement plan assets in the aggregate of at least $1 million and 250
participants in the aggregate and (ii) maintain their accounts with the Fund's
transfer agent.
PRUARRAY SAVINGS PROGRAM. Class Z shares of the Fund are also offered to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (i) employees who open an
IRA or Savings Accumulation Plan account with the Fund's transfer agent and (ii)
spouses of employees who open an IRA account with the Fund's transfer agent. The
program is offered to companies that have at least 250 eligible employees.]
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares."
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISOR.
19
<PAGE>
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan, in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the SEC.
Securities will be readily marketable and will be valued in the same manner as a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Company has, however, elected to be governed by Rule 18f-1 under
the Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during a 90-day period for any one shareholder.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE COMPANY AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE
OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS. CLASS Z SHAREHOLDERS OF THE FUND WHO ARE ELIGIBLE TO
PURCHASE CLASS Z SHARES OF OTHER
20
<PAGE>
PRUDENTIAL MUTUAL FUNDS HAVE THE ABILITY TO EXCHANGE THEIR SHARES OF THE FUND
FOR CLASS Z SHARES OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV.
SHAREHOLDERS WHO ARE ELIGIBLE TO PURCHASE CLASS A SHARES OF OTHER PRUDENTIAL
MUTUAL FUNDS HAVE THE ABILITY TO EXCHANGE THEIR SHARES OF THE FUND FOR CLASS A
SHARES OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. CLASS I SHAREHOLDERS
HAVE THE ABILITY TO EXCHANGE THEIR CLASS I SHARES OF THE FUND FOR CLASS Z SHARES
OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. An exchange will be treated as
a redemption and purchase for tax purposes.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The exchange privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
The Fund reserves the right to reject any exchange order including
exchanges (and market timing transactions) which are of a size and/or frequency
engaged in by one or more accounts acting in concert or otherwise, that have or
may have an adverse effect on the ability of the Subadviser to manage the
portfolio. The determination that such exchanges or activity may have an adverse
effect and the determination to reject any exchange order shall be in the
discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund at NAV. You may direct the Transfer Agent
in writing not less than 5 full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
If you hold shares through Prudential Securities, you should contact your
financial adviser.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are
21
<PAGE>
available through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. See also
"Shareholder Investment Account--Systematic Withdrawal Plan" in the Statement of
Additional Information.
o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
22
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- --------------------------------------------------------------------------------
------------------
TAXABLE BOND FUNDS
------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
---------------------
TAX-EXEMPT BOND FUNDS
---------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
------------
GLOBAL FUNDS
------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
------------
EQUITY FUNDS
------------
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
------------------
MONEY MARKET FUNDS
------------------
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
A-1
<PAGE>
[This page intentionally left blank]
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS .......................................................... 2
What are the Fund's Risk Factors and
Special Characteristics? ............................................... 2
FUND EXPENSES ............................................................ 4
FINANCIAL HIGHLIGHTS ..................................................... 5
HOW THE FUND INVESTS ..................................................... 6
Investment Objective and Policies ....................................... 6
Other Investments and Policies .......................................... 8
Hedging and Return Enhancement Strategies ............................... 9
Investment Restrictions ................................................. 11
HOW THE FUND IS MANAGED .................................................. 12
Manager ................................................................. 12
Subadviser .............................................................. 12
Distributor ............................................................. 13
Fee Waivers and Subsidy ................................................. 14
Portfolio Transactions .................................................. 14
Custodian and Transfer and
Dividend Disbursing Agent .............................................. 14
HOW THE FUND VALUES ITS SHARES ........................................... 14
HOW THE FUND CALCULATES PERFORMANCE ...................................... 14
TAXES, DIVIDENDS AND DISTRIBUTIONS ....................................... 15
GENERAL INFORMATION ...................................................... 16
Description of Shares ................................................... 16
Additional Information .................................................. 17
SHAREHOLDER GUIDE ........................................................ 17
How to Buy Shares of the Fund ........................................... 17
How to Sell Your Shares ................................................. 19
How to Exchange Your Shares ............................................. 20
Shareholder Services .................................................... 21
THE PRUDENTIAL MUTUAL FUND FAMILY ........................................ A-1
================================================================================
MF174A
- -------------------------------------------
CUSIP No.: Class Z: 74431F209
Class I: 74431F860
- -------------------------------------------
PRUDENTIAL
STOCK
INDEX
FUND
PROSPECTUS
JUNE 18, 1997
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
PRUDENTIAL ACTIVE BALANCED FUND
PRUDENTIAL STOCK INDEX FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL EUROPE INDEX FUND
Statement of Additional Information
dated June 18, 1997
Prudential Active Balanced Fund, Prudential Stock Index Fund,
Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential
Pacific Index Fund and Prudential Europe Index Fund (each a Fund and
collectively, the Funds) are each a series of Prudential Dryden Fund (the
Company).
The investment objective of Prudential Active Balanced 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 money market instruments.
The investment objective of Prudential Stock Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
The investment objective of Prudential Small-Cap Index Fund is to seek
to provide investment results that correspond to the price and yield performance
of a broad-based index of small cap stocks. The Prudential Small-Cap Index Fund
currently uses the Standard & Poor's 600 Small Capitalization Stock Index for
that purpose.
The investment objective of Prudential Bond Market Index Fund is to
seek to provide investment results that correspond to the total return
performance of a broad-based index of fixed-income securities. The Prudential
Bond Market Index Fund currently uses the Lehman Brothers Aggregate Index for
that purpose.
The investment objective of Prudential Pacific Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
a broad-based index of securities of issuers in the Pacific region. The
Prudential Pacific Index Fund currently uses the Morgan Stanley Capital
International Pacific Index for that purpose.
The investment objective of Prudential Europe Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
a broad-based index of securities of European issuers. The Prudential Europe
Index Fund currently uses the Morgan Stanley Capital International Europe Index
for that purpose.
There can be no assurance that a Fund's investment objective will be
achieved. See "Investment Objectives and Policies."
The Company's address is Gateway Center Three, Newark, New Jersey
07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of Prudential Active Balanced Fund,
dated November 29, 1996, as supplemented on June 18, 1997, the Prospectus of
Prudential Stock Index Fund dated June 18, 1997, and the Prospectus of
Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential
Pacific Index Fund and Prudential Europe Index Fund, dated June 18, 1997, copies
of which may be obtained from the Company upon request.
TABLE OF CONTENTS
Page
----
General Information .................................................... B-2
Investment Objectives and Policies ..................................... B-2
Investment Restrictions ................................................ B-16
Trustees and Officers .................................................. B-17
Manager and Subadvisers ................................................ B-23
Distributor ............................................................ B-26
Portfolio Transactions and Brokerage ................................... B-28
Purchase and Redemption of Fund Shares ................................. B-29
Shareholder Investment Account ......................................... B-32
Net Asset Value ........................................................ B-36
Taxes .................................................................. B-37
Performance and Yield Information ...................................... B-39
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants ......................................... B-41
Financial Statements ................................................... B-42
Appendix--Description of Ratings ....................................... A-1
Appendix I--Historical Performance Data ................................ I-1
Appendix II--General Investment Information ............................ II-1
Appendix III--Information Relating to The Prudential ................... III-1
<PAGE>
GENERAL INFORMATION
The Company changed its name from The Prudential Institutional Fund to
Prudential Dryden Fund effective October 30, 1996. In addition, Active Balanced
Fund changed its name to Prudential Active Balanced Fund and Stock Index Fund
changed its name to Prudential Stock Index Fund at the same time. On February
19, 1997, the Trustees approved the addition of the following four Funds to the
Company: Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL ACTIVE BALANCED FUND
FORWARD ROLLS AND DOLLAR ROLLS
Forward roll and dollar roll transactions involve the risk that the
market value of the securities sold by Prudential Active Balanced 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 or liquid assets, having a value equal to the repurchase
price (including accrued interest). See "Investment Policies Applicable to Each
of the Funds--Segregated Accounts" below.
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. Government National Mortgage
Association (GNMA), the principal U.S. guarantor of such securities, is a wholly
owned corporate instrumentality of the United States within the Department of
Housing and Urban Development. Pass-through securities issued by the Federal
National Mortgage Association (FNMA) are guaranteed as to timely payment of
principal and interest by FNMA, which guarantee is not backed by the full faith
and credit of the U.S. Government. The Federal Home Loan Mortgage Corporation
(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 ultimate, but generally not timely, collection of
principal by FHLMC. The obligations of the FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. Government.
Prudential Active Balanced Fund expects 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
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, the Fund, consistent with its investment
objective and policies, will consider making investments in those new types of
securities.
The Fund 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.
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Because prepayments of principal generally occur when interest rates
are declining, it is likely that the 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, the 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 the 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 the Fund will be able to effect a trade of IOs or POs at a time when it
wishes to do so. The Fund will acquire IOs and POs only if, in the opinion of
the Fund's Subadviser, a secondary market for the securities exists at the time
of acquisition, or is subsequently expected. The 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, in
order not to hold more than 10% of its net assets in illiquid securities. With
respect to IOs and POs that are issued by the U.S. Government, the Subadviser,
subject to the supervision of the Trustees, may determine that such securities
are liquid, if it determines 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.
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 the Fund not fully recovering its initial investment in an IO.
COLLATERALIZED MORTGAGE OBLIGATIONS
Prudential Active Balanced Fund also may invest in, among other things,
parallel pay Collateralized Mortgage Obligations (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 Securities and Exchange Commission (SEC) rules and
orders, the Fund's 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 limitations of the Investment Company Act of 1940
(Investment Company Act) 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
Investment Company Act, and (iv) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that the Fund
selects CMOs or REMICs that do not meet the above requirements, the Fund may not
invest more than 10% of its assets in all such entities and may not acquire more
than 3% of the voting securities of any single such entity.
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
enhancement for the pool.
CUSTODIAL RECEIPTS
Prudential Active Balanced 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
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<PAGE>
payments or both on certain notes or bonds issued by the U.S. Government, its
agencies 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, the 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, the 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.
LIQUIDITY PUTS
Prudential Active Balanced 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 its investment objective, the 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. The 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 Subadviser 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 Subadviser 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
the Fund's investment restriction.
LOWER-RATED AND UNRATED DEBT SECURITIES
Prudential Active Balanced Fund may invest, to a limited extent, in
lower-rated and unrated debt securities. Non-investment grade fixed-income
securities are rated lower than Baa (or the equivalent rating or, if not rated,
determined by the Subadviser 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.
Prudential Active Balanced Fund is not authorized to invest in excess of 5% of
its net assets in non-investment grade fixed-income securities.
The markets in which lower-rated securities (or unrated securities that
are equivalent to 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 Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of debt securities for the Prudential Active Balanced Fund to
purchase and may also have the effect of limiting the ability of the 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, the Prudential
Active Balanced Fund may have to replace the security with a lower-yielding
security,
B-4
<PAGE>
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 the 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 the 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.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL STOCK INDEX FUND
If net cash outflows from Prudential Stock Index Fund are anticipated,
the Fund may sell stocks (in proportion to their weighting in the Standard &
Poor's 500 Composite Stock Price Index (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 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 Prudential 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 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
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (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.
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 THE 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.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL SMALL-CAP INDEX FUND
If net cash outflows from Prudential Small-Cap Index Fund are
anticipated, the Fund may sell stocks (in proportion to their weighting in the
Standard & Poor's 600 Small Capitalization Stock Index (S&P 600 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. If Prudential
Small-Cap 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 600 Index.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY 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 600
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 600 INDEX WHICH IS DETERMINED, COMPOSED AND
CALCULATED BY S&P
B-5
<PAGE>
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 600 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.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
600 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 THE MANAGER, SHAREHOLDERS, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 600 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 600 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.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL BOND MARKET INDEX FUND
If net cash outflows from Prudential Bond Market Index Fund are
anticipated, the Fund may sell securities (in proportion to their weighting in
the Lehman Brothers Aggregate 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 securities needed to
meet the cash requirements. If Prudential Bond Market 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 Lehman
Brothers Aggregate Index.
The Fund is not sponsored, endorsed, sold or promoted by Lehman
Brothers Inc.
MORTGAGE-BACKED 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. Government National Mortgage
Association (GNMA), the principal U.S. guarantor of such securities, is a wholly
owned corporate instrumentality of the United States within the Department of
Housing and Urban Development. Pass-through securities issued by the Federal
National Mortgage Association (FNMA) are guaranteed as to timely payment of
principal and interest by FNMA, which guarantee is not backed by the full faith
and credit of the U.S. Government. The Federal Home Loan Mortgage Corporation
(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 ultimate, but generally not timely, collection of
principal by FHLMC. The obligations of the FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. Government.
Prudential Bond Market Index Fund expects 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
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, the Fund, consistent with its investment
objective and policies, will consider making investments in those new types of
securities.
The average maturity of pass-through pools of mortgage-backed
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
B-6
<PAGE>
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 the 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, the Fund's yield will correspondingly
decline. Thus, mortgage-backed 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 the Fund purchases mortgage-backed securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL PACIFIC INDEX FUND
If net cash outflows from Prudential Pacific Index Fund are
anticipated, the Fund may sell stocks (in proportion to their weighting in the
Morgan Stanley Capital International Pacific Index (MSCI-Pacific 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. If Prudential Pacific
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 MSCI-Pacific Index.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley
& Co. Incorporated.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL EUROPE INDEX FUND
If net cash outflows from Prudential Europe Index Fund are anticipated,
the Fund may sell stocks (in proportion to their weighting in the Morgan Stanley
Capital International Europe Index (MSCI-Europe 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. If Prudential Europe 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 MSCI-Europe Index.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley
& Co. Incorporated.
INVESTMENT POLICIES APPLICABLE TO EACH 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, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land
Banks, 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 investment
adviser determines that the instrumentality's credit risk does not render its
securities unsuitable for investment by the Fund.
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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 securities 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. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation dependent upon a
market price advance in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
In recent years, convertibles have been developed which combine higher
or lower current income with options and other features. The Funds may invest in
these types of convertible securities.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Prudential Active Balanced Fund may enter into repurchase and reverse
repurchase agreements. Prudential Stock Index Fund, Prudential Small-Cap Index
Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund and
Prudential Europe Index Fund have the authority to enter into reverse repurchase
agreements, dollar rolls and forward rolls, but do not plan to do so for the
foreseeable future; they may enter into repurchase agreements. Each Fund may
enter into such agreements with banks and securities dealers which meet the
creditworthiness standards established by the Company's Trustees (Qualified
Institutions). The investment 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 rate or date of maturity of the purchased security. The Funds receive
collateral equal to the resale price, which is marked-to-market daily. These
agreements permit each 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, a 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 a 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, a Fund may suffer a loss to the extent proceeds from the sale of
the underlying collateral are less than the repurchase price. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by Prudential Active Balanced Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase.
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FIXED-INCOME SECURITIES
In general, the ratings of Moody's Investors Service, Inc. (Moody's),
Standard & Poor's Ratings Group (S&P Ratings), 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 Subadviser 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 Ratings, Duff & Phelps or another NRSRO, the Fund will attempt to
use comparable ratings as standards for its investments in accordance with its
investment objectives and policies. An Appendix to this Statement of Additional
Information contains further information concerning the ratings of Moody's, S&P
Ratings and Duff & Phelps and their significance.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
To secure prices deemed advantageous at a particular time, each 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 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.
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.
BORROWING
Each Fund may borrow from time to time, at its Subadviser's discretion,
to take advantage of investment opportunities, when yields on available
investments exceed interest rates and other expenses of related borrowing, or
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when, in the Subadviser'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. A Fund may borrow through forward rolls,
dollar rolls or reverse repurchase agreements, although no Fund except
Prudential Active Balanced Fund currently has any intention of doing so.
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 the
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 a Fund 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 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 supervision of foreign stock exchanges,
brokers and issuers which may make it difficult to enforce contractual
obligations.
OPTIONS ON SECURITIES AND SECURITIES INDICES
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 (OTC) option
positions is more limited than the ability to terminate exchange-traded option
positions because a Fund would have to negotiate directly with a contra party.
In addition, with OTC options, there is a risk that the contra party in such
transactions will not fulfill its 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 of 1986, as amended (the Internal
Revenue Code) for qualification as a regulated investment company.
The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when a Fund writes a call
option on an index it cannot provide in advance for its potential settlement
obligations
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by acquiring and holding the underlying securities. A Fund can
offset some of the risk of writing a call index option position by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, the Fund cannot, as a practical matter, acquire and
hold a portfolio containing exactly the same securities as underlie the index
and, as a result, bears a risk that the value of the securities held will vary
from the value of the index.
Even if a Fund could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
know that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as a common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date; and by the time it learns that it has been assigned, the
index may have declined, with a corresponding decline in the value of its
securities portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If a Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
A Fund will not purchase put options or call options if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of the
Fund's net assets. The aggregate value of the obligations underlying put options
will not exceed 25% of a Fund's net 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 purposes and for
the other purposes described in each Fund's Prospectus. A Fund may enter into
futures contracts in order to hedge against changes in interest rates, stock
market prices or currency exchange rates.
The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, and writing put options on futures contracts can serve as a
limited long hedge.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit "initial margin,"
consisting of cash or U.S. Government securities, in an amount generally equal
to 10% or less of the contract value. Margin must also be deposited when writing
a call or put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin does
not represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required by an
exchange to increase the level of its initial margin payment.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
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represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs are all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures and options on futures transactions only
on exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin calls
and might be compelled to liquidate futures or options on futures contract
positions whose prices are moving unfavorably to avoid being subject to further
calls. These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures market are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the futures
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
FOREIGN CURRENCY FORWARD CONTRACTS, OPTIONS AND FUTURES TRANSACTIONS
There is no limitation on the value of forward contracts into which
Prudential Active Balanced Fund may enter. Prudential Active Balanced Fund's,
Prudential Europe Index Fund's and Prudential Pacific Index 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. The 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.
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A Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when the Fund contracts for
the purchase or sale of a security denominated in a foreign currency, or (ii)
when the 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, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received. Additionally, when the Fund's Subadviser 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, the Fund may enter into a forward contract in one
foreign currency, or basket of currencies, to hedge against the decline or
increase in value in another foreign currency. Use of a different currency or
basket of currencies magnifies the risk that movements in the price of the
forward contract will not correlate or will correlate unfavorably with the
foreign currency being hedged.
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. Failure by the Fund's contra party to make or take delivery of the
underlying currency at the maturity of the forward contract would result in the
loss to the Fund of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the contra party. Thus, there can be
no assurance that a Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Fund might be unable to close out a forward
currency contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities in a
segregated account.
Prudential Active Balanced Fund, Prudential Europe Index Fund and
Prudential Pacific Index Fund may purchase and write put and call options on
foreign currencies traded on securities exchanges or boards of trade (foreign
and domestic) and OTC options 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 the Fund has the right to take or make
delivery of a specified amount of foreign currency, rather than securities.
Generally, the OTC foreign currency options used by these Funds are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
If a Fund's Subadviser 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 or
write put options on the foreign currency. The Fund could also enter into a long
forward contract or a long futures contract on such currency, or purchase a call
option, or write a put option, on a currency futures contract. The use of such
instruments could offset, at least partially, the effects of the adverse
movements of the exchange rates.
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FOREIGN CURRENCY STRATEGIES--SPECIAL CONSIDERATIONS
Prudential Active Balanced Fund, Prudential Europe Index Fund and
Prudential Pacific Index Fund may use options on foreign currencies, futures on
foreign currencies, options on futures on foreign currencies and forward
currency contracts, to hedge against movements in the values of the foreign
currencies in which the Fund's securities are denominated. Such currency hedges
can protect against price movements in a security that the Fund owns or intends
to acquire that are attributable to changes in the value of the currency in
which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no futures contract, forward contract or option
involving that currency is available or one of such contracts is more expensive
than certain other contracts. In such cases, the Fund may hedge against price
movements in that currency by entering into a contract on another currency or
basket of currencies, the values of which the Fund's Subadviser believes will
have a positive correlation to the value of the currency being hedged. The risk
that movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, a Fund could be disadvantaged by dealing in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.
Settlement of futures contracts, forward contracts and options
involving foreign currencies might be required to take place within the country
issuing the underlying currency. Thus, the Fund might be required to accept or
make delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
COVERED FORWARD CURRENCY CONTRACTS, FUTURES CONTRACTS AND OPTIONS
Transactions using forward currency contracts, futures contracts and
options (other than options that a Fund has purchased) expose the Fund to an
obligation to another party. No Fund will enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies, or other options, forward currency contracts or futures contracts,
or (2) liquid assets with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. Each Fund will comply with SEC
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash or liquid assets in a segregated account with its
Custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding forward currency contract, futures
contract or option is open, unless they are replaced with similar assets. As a
result, the commitment of a large portion of the Fund's assets to cover or
segregated accounts could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
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SEGREGATED ACCOUNTS
Each Fund will establish a segregated account with its Custodian, State
Street Bank and Trust Company (State Street), in which it will maintain cash,
U.S. Government securities, equity securities (including foreign securities),
debt securities or other liquid, unencumbered assets equal in value to its
obligations in respect of potentially leveraged transactions. These include
forward contracts, when-issued and delayed delivery securities, futures
contracts, written options and options on futures contracts (unless otherwise
covered). If collateralized or otherwise covered, in accordance with SEC
guidelines, these will not be deemed to be senior securities. The assets
deposited in the segregated account will be marked-to-market daily.
ILLIQUID SECURITIES
Each of the Funds may hold up to 15% of its net assets in illiquid
securities. Illiquid securities include repurchase agreements which have a
maturity of longer than seven days and 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 National Association of Securities Dealers, Inc. (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 Subadvisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, Subadvisers will consider, among other things, the 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 NRSROs, or if only one NRSRO rates the securities, by
that NRSRO, or, if
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unrated, be of comparable quality in the view of the investment adviser, and
(ii) it must not be "traded flat" (i.e., without accrued interest) or in default
as to principal or interest. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
The staff of the SEC has taken the position that purchased OTC options
and the assets used as "cover" for written OTC options are illiquid securities
unless the Fund and the counterparty have provided for the Fund, at the Fund's
election, to unwind the OTC option. The exercise of such an option would
ordinarily involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the securities used as "cover" as liquid. The Fund will also treat
non-U.S. Government IOs and POs as illiquid so long as the staff of the SEC
maintains its position that such securities are illiquid.
OTHER INVESTMENT TECHNIQUES
Each Fund may take advantage of opportunities in the area of options
and futures contracts and any other derivative instruments that are not
presently contemplated for use by such Fund or that are not currently available
but that 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 Investment Company 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 Investment Company 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.
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.
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 a 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% of the value of its total assets to take
advantage of investment opportunities, for temporary, extraordinary or emergency
purposes, or for the clearance of
B-16
<PAGE>
transactions and may pledge up to 20% of the value of its total assets to secure
such borrowings. For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed delivery basis; the purchase 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.)
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.
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, 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.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ -------------- ----------------------
<S> <C> <C>
Edward D. Beach (72) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; prior thereto, Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield
Income Fund, Inc.
Delayne Dedrick Gold (58) Trustee Marketing and Management Consultant; Director of The High
Yield Income Fund, Inc.
*Robert F. Gunia (50) Trustee Comptroller, Prudential Investments (since May 1996);
Executive Vice President and Treasurer (since December
1996), Prudential Investments Fund Management LLC
(PIFM); Senior Vice President (since March 1987) of
Prudential Securities Incorporated (Prudential Securities);
formerly Chief Administrative Officer (July 1990-
September 1996), Director (January 1989-September
1996) and Executive Vice President,Treasurer and Chief
Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice President
and Director of The Asia Pacific Fund, Inc.
(since May 1989); Director of The High Yield Income
Fund, Inc.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ -------------- ----------------------
<S> <C> <C>
Donald D. Lennox (78) Trustee Chairman (since February 1990) and Director (since April
1989) of International Imaging Materials, Inc. (thermal
transfer ribbon manufacturer); Retired Chairman, Chief
Executive Officer and Director of Schlegel Corporation
(industrial manufacturing) (March 1987-February 1989);
Director of Gleason Corporation, Personal Sound
Technologies, Inc. and The High Yield Income Fund, Inc.
Douglas H. McCorkindale (57) Trustee Vice Chairman, Gannett Co. Inc. (publishing and media) (since
March 1984); Director of Gannett Co. Inc., Frontier
Corporation and Continental Airlines, Inc.
*Mendel A. Melzer, CFA (35) Trustee Chief Investment Officer (since October 1996) of Prudential
751 Broad St. Mutual Funds; formerly Chief Financial Officer (November
Newark, NJ 07102 1995-September 1996) of Prudential Investments, Senior
Vice President and Chief Financial Officer (April
1993-November 1995) of Prudential Preferred Financial
Services, Managing Director (April 1991-April 1993) of
Prudential Investment Advisors and Senior Vice President
(July 1989-April 1991) of Prudential Capital Corporation;
Chairman and Director of Prudential Series Fund, Inc.;
Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (55) Trustee President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Monroe County Water Authority,
Rochester Jobs, Inc., Executive Service Corps of
Rochester, Monroe County Industrial Development
Corporation, Northeast Midwest Institute, The Business
Council of New York State, First Financial Fund, Inc., The
High Yield Income Fund, Inc. and The High Yield Plus
Fund, Inc.
Stephen P. Munn (54) Trustee Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988-December 1993)
of Carlisle Companies Incorporated (manufacturer of
industrial products).
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ -------------- ----------------------
<S> <C> <C>
*Richard A. Redeker (53) President and Employee of Prudential Investments; formerly President, Chief
751 Broad St. Trustee Executive Officer and Director (October 1993-September
Newark, NJ 07102 1996), Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and Member of the
Operating Committee (October 1993-September 1996),
Prudential Securities, Director (October 1993-September
1996) of Prudential Securities Group, Inc., Executive Vice
President, The Prudential Investment Corporation (PIC)
(January 1994-September 1996), Director (January
1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund Services, Inc.
and Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-Septem-
ber 1993); President and Director of The High Yield
Income Fund, Inc.
Robin B. Smith (57) Trustee Chairman and Chief Executive Officer (since August 1996),
of Publishers Clearing House; formerly President and Chief
Executive Officer (January 1988-August 1996) and
President and Chief Operating Officer (September
1981-December 1988) of Publishers Clearing House;
Director of BellSouth Corporation, Texaco Inc., Spring
Industries Inc. and Kmart Corporation.
Louis A Weil, III (55) Trustee Publisher and Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central Newspa-
pers, Inc.; Chairman of the Board (since January 1996),
Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.;
formerly Publisher of Time Magazine (May 1989-March
1991), President, Publisher & CEO of The Detroit News
(February 1986-August 1989), member of the Advisory
Board, Chase Manhattan Bank-Westchester; Director of
The High Yield Income Fund, Inc.
Clay T. Whitehead (58) Trustee President, National Exchange Inc. (new business development
firm) (since May 1983).
Grace C. Torres (37) Treasurer and First Vice President (since December 1996) of PIFM; First Vice
Principal President (since March 1994) of Prudential Securities; formerly
Financial and First Vice President(March 1994-September 1996) of
Accounting Prudential Mutual Fund Management, Inc. and Vice President
Officer (July 1989-March 1994) of Bankers Trust Corporation.
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ -------------- ----------------------
<S> <C> <C>
S. Jane Rose (51) Secretary Senior Vice President (since December 1996), PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since July 1992);
formerly Senior Vice President (January 1991-September 1996)
and Senior Counsel (June 1987-December 1990) of Prudential
Mutual Fund Management, Inc. and Vice President and Associate
General Counsel of Prudential Securities.
Susan C. Cote (42) Vice President Vice President, Finance (since February 1997) Prudential Mutual
Funds & Annuities (PMF&A); Executive Vice President (since February 1997)
and Chief Financial Officer (since May 1996), PIFM; formerly Managing
Director (February 1995-May 1996) and Vice President (February 1995-May
1996) Prudential Investments; Senior Vice President (January 1989-
January 1995) of Prudential Mutual Fund Management, Inc.; Senior Vice
President (January 1992-January 1995) of Prudential Securities.
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997, PMF&A; Executive
Vice President, Secretary and General Counsel (since December 1996) of
PIFM; formerly Vice President and General Counsel (March 1994-March 1997)
of Prudential Retirement Services and Associate General Counsel and
Chief Financial Services Officer (1988-1994), Frank Russell Company.
Stephen M. Ungerman (43) Assistant Tax Director (since March 1996) of Prudential Investments
Treasurer and the Private Asset Group of The Prudential Insurance
Company of America (Prudential); formerly First Vice
President of Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); prior thereto, Senior
Tax Manager of Price Waterhouse (1981-January 1993).
Marguerite E.H. Morrison (41) Assistant Vice President (since December 1996) of PIFM; Vice President and
Secretary Associate General Counsel (since September 1987) of Prudential Securities;
formerly Vice President and Associate General Counsel (June
1991-September 1996) of Prudential Mutual Fund Management, Inc.;
</TABLE>
- ----------
(1) Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three,Newark, New Jersey 07102-4077.
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, PIFM or Prudential Securities.
Trustees and officers of the Funds are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Funds, while the Trustees, in addition to their functions set forth under
"Manager and Subadvisers" and "Distributor," review such actions and decide on
general policy.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Messrs. Lennox and
Beach are scheduled to retire on December 31, 1997 and 1999, respectively.
B-20
<PAGE>
As of June 13, 1997, the Trustees and officers of the Company as a
group owned beneficially less than 1% of the shares of beneficial interest of
the Company. As of June 13, 1997, each of the following entities owned more than
5% of the outstanding voting securities of each of the Funds indicated:
<TABLE>
<CAPTION>
PORTFOLIO SHARES
- --------- ------
<S> <C> <C>
Prudential Active Balanced Fund
Class Z shares Pru Defined Contribution SVSC 4,615,826(40.5%)
FBO Pru-DC Qualified Clients
Attn: John Surdy
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Trust Company 6,391,413(56.0%)
FBO Pru-DC Clients
Attn: John Surdy
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Stock Index Fund
Class Z shares Prudential Employee Savings Plan 8,129,034(53.5%)
71 Hanover Road
Florham Park, NJ 07932-1502
Prudential Trust Company 6,665,606(43.9%)
FBO Pru-DC Clients
Attn: John Surdy
30 Scranton Office Park
Moosic, PA 18507-1774
</TABLE>
As of June 13, 1997, Prudential Securities was the record holder for
other beneficial owners of 16.3 Class A shares (or 49.6% of the outstanding
Class A shares), 5,359 Class B shares (or 62.4% of the outstanding Class B
shares), 0 Class C shares (or 0% of the outstanding Class C shares) and 0 Class
Z shares (or 0% of the outstanding Class Z shares) of the Prudential Active
Balanced Fund and 326,574 Class Z shares (2% of the outstanding Class Z shares)
of Prudential Stock Index Fund. In the event of any meeting of shareholders,
Prudential Securities will forward or cause the forwarding of proxy materials to
the beneficial owners for which it is the record owner.
The Company pays each of its Trustees who is not an affiliated person
of the investment adviser annual compensation of $2,500. The amount of annual
compensation paid to each Trustee may change as a result of the introduction of
additional funds upon which the Trustee will be asked to serve.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
accrues daily the amount of such Trustees' fee which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Company. Payment of the interest so accrued
is also deferred and accruals become payable at the option of the Trustee. The
Company's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Company.
The interested Trustees serve without compensation. The following table
sets forth the aggregate compensation paid by the Company to the Trustees who
were not affiliated with the Manager for the fiscal year ended September 30,
1996 and the aggregate compensation paid to such Trustees for service on the
Company's Board and that of all other funds managed by Prudential Investments
Fund Management LLC (Fund Complex) for the year ended December 31, 1996.
B-21
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
------------------
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ACCRUED ESTIMATED FROM COMPANY
AGGREGATE AS PART OF ANNUAL AND FUND
COMPENSATION COMPANY BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM COMPANY@ EXPENSES RETIREMENT TO TRUSTEES
- ----------------- ------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Edward D. Beach--Trustee -- NONE N/A $166,000(21/39)**
Mark R. Fetting--Trustee+/++ -- NONE N/A --
David A. Finley--Trustee++ $21,000 NONE N/A 21,000(1/7)**
William E. Fruhan, Jr.--Trustee++ 21,000 NONE N/A 21,000(1/7)**
Delayne D. Gold--Trustee -- NONE N/A 175,308(21/42)**
Robert F. Gunia--Trustee+ -- NONE N/A --
Donald D. Lennox--Trustee -- NONE N/A 90,000(10/22)**
Douglas H. McCorkindale--Trustee+++ -- NONE N/A 71,208(10/13)**
Mendel A. Melzer--Trustee+ -- NONE N/A --
Thomas T. Mooney--Trustee+++ -- NONE N/A 135,375(18/36)**
Stephen P. Munn--Trustee -- NONE N/A 49,125(6/8)**
August G. Olsen--Trustee*/++ 21,000 NONE N/A 21,000(1/7)**
Richard A. Redeker--Trustee+ -- NONE N/A --
Robin B. Smith--Trustee+++ -- NONE N/A 89,957(11/20)**
Herbert G. Stolzer--Trustee*/++ 21,000 NONE N/A 21,000(1/7)**
Louis A. Weil, III--Trustee -- NONE N/A 91,250(13/18)**
Clay T. Whitehead--Trustee -- NONE N/A 38,292(5/7)**
</TABLE>
- ----------
@ Effective January 1997, the annual compensation paid to Trustees was
reduced to $2,500 in addition to certain out-of-pocket expenses.
* All of the compensation from the Company for the fiscal year ended
September 30, 1996 represents deferred compensation. Aggregate
compensation from the Company and the Fund Complex for the fiscal year
ended September 30, 1996, including accrued income and appreciation,
amounted to approximately $24,000 for Mr. Olsen and approximately $24,500
for Mr. Stolzer.
** Indicates number of Funds/portfolios in Fund Complex to which aggregate
compensation relates.
+ Mark R. Fetting, Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker,
who are or were interested Trustees, do not receive compensation from the
Company or any fund in the Fund Complex.
++ Indicates Trustee who did not stand for reelection.
+++ Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,034,
$139,869 and $109,294 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
B-22
<PAGE>
MANAGER AND SUBADVISERS
The manager of the Company is Prudential Investments Fund Management
LLC (formerly Prudential Mutual Fund Management LLC) (PIFM or the Manager),
Gateway Center Three, Newark, New Jersey 07102-4077. PIFM serves as manager to
all of the other investment companies that, together with the Funds, comprise
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus of each Fund. As of May 31, 1997, PIFM managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $56 billion. According to the Investment Company Institute, as of
December 31, 1996, the Prudential Mutual Funds were the 15th largest family of
mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned
subsidiary of PIFM, serves as the transfer agent for the Prudential Mutual Funds
and, in addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to two Management Agreements with the Company (individually,
the Management Agreement and collectively, the Management Agreements), PIFM,
subject to the supervision of the Company's Board of Trustees and in conformity
with the stated policies of each Fund, manages both the investment operations of
each Fund and the composition of each Fund's portfolio, including the purchase,
retention, disposition and loan of securities and other assets. In connection
therewith, PIFM is obligated to keep certain books and records of the Company.
PIFM also administers the Company's corporate affairs and, in connection
therewith, furnishes 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 Funds' custodian (the Custodian), and
PMFS, the Funds' transfer and dividend disbursing agent. The management services
of PIFM for the Funds are not exclusive under the terms of the Management
Agreements and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreements,
a fee at an annual rate of .65 of 1% of Prudential Active Balanced Fund's
average daily net assets, .30 of 1% of Prudential Stock Index Fund's average
daily net assets, .30 of 1% of Prudential Small-Cap Index Fund's average daily
net assets, .25 of 1% of Prudential Bond Market Index Fund's average daily net
assets, .40 of 1% of Prudential Pacific Index Fund's average daily net assets
and .40 of 1% of Prudential Europe Index Fund's average daily net assets. The
fee is computed daily and payable monthly. Each Management Agreement also
provides that, in the event the expenses of a Fund (including the fees of PIFM,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. No such reductions were required during
the fiscal year ended September 30, 1996. No jurisdiction currently limits the
Funds' expenses.
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' Subadvisers;
(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 or fees payable to The Prudential
Investment Corporation, doing business as Prudential Investments (PI), and
Jennison Associates Capital Corp. (Jennison) (collectively, the Subadvisers)
pursuant to the subadvisory agreements between the Manager and the Subadvisers
(collectively, the Subadvisory Agreements).
B-23
<PAGE>
Under the terms of the Management Agreements, 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' Subadvisers, (iii) the fees and certain
expenses of the Custodian and Transfer and Dividend Disbursing Agent, including
the cost of providing records to the Manager in connection with its obligation
of maintaining required records of the 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
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 of 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 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 and (xiii) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Company's business.
The Management Agreements provide that PIFM 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 Agreements relate, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
Each Management Agreement provides that it will terminate automatically if
assigned and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. Each Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement for Prudential Active Balanced Fund and Prudential Stock Index Fund
was last approved by the Trustees of the Company, including all of the Trustees
who are not parties to the contract or interested persons of any such party as
defined in the Investment Company Act, on May 21, 1997 and by the shareholders
of Prudential Stock Index Fund and Prudential Active Balanced Fund on October
30, 1996. The Management Agreement for Prudential Small-Cap Index Fund,
Prudential Bond Market Index Fund, Prudential Pacific Index Fund and Prudential
Europe Index Fund was last approved by the Trustees of the Company, including
all of the Trustees who are not parties to the contract or interested persons of
any such party as defined in the Investment Company Act, on May 21, 1997,
Prudential Institutional Fund Management, Inc., the manager of Prudential Active
Balanced Fund and Prudential Stock Index Fund until October 30, 1996 received,
before any reduction due to the subsidy by the Manager of certain expenses of
Prudential Stock Index Fund and Prudential Active Balanced 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:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------ ------------------ ------------------
FUND AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ---- ------ ---- ------ ---- ------ ----
Stock Index $570,160 .40% $286,843 .40% $152,392 .40%
Active Balanced 994,182 .70 733,748 .70 412,941 .70
During the same period the manager subsidized certain expenses of these Funds.
See "How the Fund is Managed--Fee Waivers and Subsidy" in the Prudential Active
Balanced Fund Prospectus and Prudential Stock Index Fund Prospectus.
The Manager has entered into Subadvisory Agreements with the
Subadvisers. The Subadvisory Agreements provide that the Subadvisers furnish
investment advisory services in connection with the management of their
respective
B-24
<PAGE>
Funds. For its service as Subadviser, Jennison is paid at an annual rate of .30
of 1% of Prudential Active Balanced Fund's average daily net assets up to and
including $300 million and .25 of 1% of the Fund's average daily net assets in
excess of $300 million. PI is reimbursed by the Manager for the reasonable costs
and expenses incurred in furnishing its services. In connection therewith, the
Subadvisers 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 Agreements and supervises the Subadvisers' performance of such
services.
Jennison is the Subadviser for the Prudential Active Balance Fund.
Acquired by the Prudential in 1985, Jennison has been engaged in the equity
investment management business since 1969. As of September 30, 1996, Jennison
managed $31.3 billion in assets for 177 clients, including approximately $3.5
billion (11.3%) in mutual funds. Of the $31.3 billion in assets, $1.8 billion
were in actively managed balance portfolios (including the Fund) and $17.3
billion in assets were in equity portfolios. Approximately 40% of Jennison's
equity clients are "Fortune 500" companies (as defined by Fortune Magazine in
the issue dated April 29, 1996). Many of these companies have retained
Jennisons' asset management services for more than ten years, some for more than
25 years as of September 30, 1996. As of September 30, 1996, Jennison also
managed $2.8 billion in international equity portfolios, and $9.5 billion in
fixed-income portfolios.
Bradley Goldberg, a senior portfolio manager at Jennison, oversees the
Prudential Active Balanced Fund. He has more than 25 years of investment
experience. Mr. Goldberg combines successful stock and bond investing with an
active asset allocation strategy to generate equity-like results with less risk
than a pure equity portfolio. When selecting stocks for the Fund, Mr. Goldberg
draws on the growth investing expertise of Jennison and modifies the style to
identify undervalued companies with attractive earnings growth prospects.
Prudential Investments Quantitative Investment Management, a unit of
PI, advises Prudential Stock Index Fund, Prudential Small-Cap Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund. Founded in 1975,
Prudential Investments Quantitative Investments Management is among the oldest
quantitatively-oriented managers in the country; currently manages close to $25
billion in balanced and equity assets.
The Global Fixed Income Group of PI is responsible as a team for the
day-to-day management of Prudential Bond Market Index Fund.
PI also manages short-term assets and cash for Prudential Active
Balanced Fund and invests available cash balances for the Fund through a joint
repurchase agreement account. PI is reimbursed by PIFM for reasonable costs and
expenses incurred by it in furnishing such services.
The Subadvisory Agreements for Prudential Active Balanced Fund and
Prudential Stock Index Fund were last approved by the Trustees, including a
majority of the Trustees who are not parties to the Agreements or interested
persons of any such party as defined in the Investment Company Act, on May 21,
1997, and by the shareholders of each such Fund on October 30, 1996. The
Subadvisory Agreement for Prudential Small-Cap Index Fund, Prudential Bond
Market Index Fund, Prudential Pacific Index Fund and Prudential Europe Index
Fund was last approved by the Trustees, including a majority of the Trustees who
are not parties to the Agreement or interested persons of any such party as
defined in the Investment Company Act on May 21, 1997.
Each Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreements. Each Subadvisory Agreement may be
terminated by the Company, the Manager or the relevant Subadviser upon not more
than 60 days', nor less than 30 days', written notice. Each Subadvisory
Agreement provides that it will continue in effect for a period of more than two
years from its execution only so long as such continuance is specifically
approved at least annually in accordance with the requirements of the Investment
Company Act.
B-25
<PAGE>
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the Class Z
shares of Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund, the Class Z and
Class I shares of Prudential Stock Index Fund and the Class A, Class B, Class C
and Class Z shares of Prudential Active Balanced Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan,
the Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (also the
Distributor) incurs the expenses of distributing Prudential Active Balanced
Fund's Class A, Class B and Class C shares. Prudential Securities serves as the
Distributor of Class Z shares of Prudential Stock Index Fund, Prudential
Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential Pacific
Index Fund, Prudential Europe Index Fund and the Class Z shares of Prudential
Active Balanced Fund and incurs the expenses of distributing the shares under a
Distribution Agreement with the Company, none of which are reimbursed by or paid
for by the Funds. See "How the Fund is Managed--Distributor" in the Prospectus
of Prudential Active Balanced Fund and the Prospectus of Prudential Stock Index
Fund and "How the Funds are Managed--Distributor" in the Prospectus of the other
Funds.
On May 17, 1996, the Board of 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 operation of the Class A, Class B or Class C
Plan or in any agreement related to the Plans (the Rule 12b-1 Trustees), at a
meeting called for the purpose of voting on each Plan, approved the Plans with
respect to Prudential Active Balanced Fund and the Distribution Agreement. The
Class A Plan provides that (i) .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. The Class B and Class C
Plans provide that (i) .25 of 1% of the average daily net assets of the Class B
and Class C shares, respectively, may be paid as a service fee and (ii) .75 of
1% (not including the service fee) may be paid for distribution-related expenses
with respect to the Class B and Class C shares, respectively (asset-based sales
charge). The Plans were each approved by the sole shareholder of the Class A,
Class B and Class C shares of Prudential Active Balanced Fund on October 30,
1996.
The Class A, Class B and Class C Plans for Prudential Active Balanced
Fund will continue in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plans may each
be terminated at any time, without penalty, by the vote of a majority of the
Rule 12b-1 Trustees or by the vote of the holders of a majority of the
outstanding shares of the applicable class on not more than 60 days', nor less
than 30 days' written notice to any other party to the Plans. The Plans may not
be amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class,
and all material amendments are required to be approved by the Board of Trustees
in the manner described above. Each Plan will automatically terminate in the
event of its assignment. Prudential Active Balanced Fund will not be obligated
to pay expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Trustees will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of Prudential Active Balanced Fund by the Distributor. The
report will include an itemization of the distribution expenses and the purposes
of such expenditures. In addition, as long as the Plans remain in effect, the
selection and nomination of Rule 12b-1 Trustees shall be committed to the Rule
12b-1 Trustees.
Pursuant to the Distribution Agreement, the Company has agreed to
indemnify Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act.
On October 21, 1993, PSI entered into an omnibus settlement with the
SEC, state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities
B-26
<PAGE>
laws to persons for whom such securities were not suitable in light of the
individuals' financial condition or investment objectives. It was also alleged
that the safety, potential returns and liquidity of the investments had been
misrepresented. The limited partnerships principally involved real estate, oil
and gas producing properties and aircraft leasing ventures. The SEC Order (i)
included findings that PSI's conduct violated the federal securities laws and
that an order issued by the SEC in 1986 requiring PSI to adopt, implement and
maintain certain supervisory procedures had not been complied with; (ii)
directed PSI to cease and desist from violating the federal securities laws and
imposed a $10 million civil penalty; and (iii) required PSI to adopt certain
remedial measures including the establishment of a Compliance Committee of its
Board of Directors. Pursuant to the terms of the SEC settlement, PSI established
a settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has agreed
to provide additional funds, if necessary, for that purpose. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action. In settling the above referenced
matters, PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order
and a Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend solicitation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Texas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. Prudential
Securities shall report any allegations or instances of criminal conduct and
material improprieties to the new director. The new director submits compliance
reports which identify any such allegations or instances of criminal conduct and
material improprieties every three months for a three-year period.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares of Prudential
Active Balanced Fund. In the case of Class B shares, interest charges equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not required to
be included in the calculation of the 6.25% limitation. The annual asset-based
sales charge with respect to Class B and Class C shares of Prudential Active
Balanced Fund may not exceed .75 of 1%. The 6.25% limitation applies to the Fund
rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
B-27
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
There are no limitations on the length of time that securities must be
held by the Funds and the Funds' annual portfolio turnover rate may vary
significantly from year to year. A portfolio turnover rate in excess of 100% may
exceed that of other investment companies with similar objectives. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. In addition, high portfolio turnover may result in increased short-term
capital gains, which, when distributed to shareholders, are treated as ordinary
income. See "Taxes."
Decisions to buy and sell assets for a Fund are made by the Fund's
Subadviser, subject to the overall review of the Manager and the Trustees.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by a Subadviser, 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 a Subadviser 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 Subadviser 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. No stated commission is generally applicable to securities traded in
U.S. OTC 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 Subadviser seeks the best overall terms available. 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
Subadvisers 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. In
assessing the best overall terms available for any transaction, the Subadviser
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, the Subadvisers, 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 (1934 Act)), a higher commission than another broker-dealer
that does not furnish such brokerage and research services might charge. The
Subadvisers must regard such higher commissions as reasonable in relation to the
brokerage and research services provided, viewed in terms of each Subadviser's
responsibilities to the Fund or other accounts, if any, as to which it exercises
investment discretion. The fees under the Management Agreement and the Advisory
Agreements, respectively, are not reduced by reason of a Fund's Subadviser
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. OTC 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 Investment
Company Act and the rules and exemptions adopted by the SEC under the Investment
Company Act, the Trustees have determined that transactions for a Fund may be
executed through Prudential Securities and other affiliated broker-dealers if,
in the judgment of the Subadviser, 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) of the
1934 Act, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Funds unless a 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 Funds at least annually a
B-28
<PAGE>
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for a Fund during the
applicable period. Brokerage transactions with PSI also are 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 Subadviser, 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 Subadvisers 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.
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 through 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 Subadviser and other investment advisory clients
of the Subadviser. 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 years ended September 30, 1996, 1995 and 1994, the Company
paid $0, $965 and $3,247, respectively, in brokerage commissions to Prudential
Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of Prudential Active Balanced Fund may be purchased at a price
equal to the next determined net asset value per share plus a sales charge
which, at the election of the investor, may be imposed either (i) at the time of
purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C
shares). Class Z shares of Prudential Active Balanced Fund, Prudential Stock
Index Fund, Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund and Class I
shares of Prudential Stock Index Fund are offered to a limited group of
investors at net asset value without any sales charges. See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus of Prudential Active
Balanced Fund and the Prospectus of Prudential Stock Index Fund and "Shareholder
Guide--How to Buy Shares of a Fund" in the Prospectus of Prudential Small-Cap
Index Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund and
Prudential Europe Index Fund.
Each class of Prudential Active Balanced Fund represents an interest in
the same assets of the Fund and is identical in all respects except that (i)
each class is subject to different sales charges and distribution and/or service
expenses (except for Class Z shares, which are not subject to any sales charge
or distribution and/or service fees), which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
Each class of Prudential Stock Index Fund represents an interest in the
same assets of the Fund and is identical in all respects except that (i) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of the other class, (ii) Class I shares are subject to nominal
transfer agency fees or expenses, (iii) Class I shares are held in a single
omnibus account and (iv) each class has a different exchange privilege. See
"Shareholder Investment Account--Exchange Privilege."
B-29
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Company and the
Distributor, for Prudential Active Balanced Fund, Class A shares are sold with a
maximum sales charge of 5% and Class B*, Class C* and Class Z shares are sold at
net asset value. For Prudential Stock Index Fund, Class Z and Class I** shares
are sold at net asset value. Using the net asset values of Prudential Active
Balanced Fund and Prudential Stock Index Fund at March 31, 1997, the maximum
offering price of each Fund's shares is as follows:
<TABLE>
<CAPTION>
PRUDENTIAL ACTIVE PRUDENTIAL STOCK
BALANCED FUND INDEX FUND
------------- ----------
<S> <C> <C>
CLASS A
Net asset value and redemption price per Class A share $12.46
Maximum sales charge (5% of offering price) .65 N/A
------
Offering price to public $13.11
======
CLASS B
Net asset value, redemption price and offering price per Class B share* $12.43 N/A
======
CLASS C
Net asset value, redemption price and offering price per Class C share* $12.43 N/A
======
CLASS Z
Net asset value, redemption price and offering price per Class Z share $12.47 $17.36
====== ======
CLASS I**
Net asset value, redemption price and offering price per Class I share $12.47 $17.36
====== ======
</TABLE>
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus of Prudential
Active Balanced Fund.
** Class I shares did not exist at March 31, 1997.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of Prudential
Active Balanced Fund concurrently with Class A shares of other Prudential Mutual
Funds, the purchases may be combined to take advantage of the reduced sales
charges applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus of Prudential
Active Balanced Fund.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement
Account (IRA);
(d) any company controlled by the individual (a person, entity
or group that holds 25% or more of the outstanding voting securities of
a company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of
which are the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors
Act account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled
by an individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
B-30
<PAGE>
The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available
through Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of Prudential Active Balanced Fund and shares of other Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) to determine the reduced sales charge. The value of shares
held directly with the Transfer Agent and through Prudential Securities will not
be aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
value of existing holdings for purposes of determining the reduced sales charge
is calculated using the maximum offering or price (net asset value plus maximum
sales charge) as of the previous business day. See "How the Fund Values its
Shares" in the Prospectus of Prudential Active Balanced Fund. The Distributor
must be notified at the time of purchase that the investor is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings. Rights of Accumulation are not
available to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of Prudential Active Balanced Fund and shares
of other Prudential Mutual Funds. (Investment Letter of Intent). Retirement and
group plans also qualify to purchase Class A shares at net asset value by
entering into a Letter of Intent whereby they agree to enroll, within a thirteen
month period, a specified number of eligible employees or participants
(Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of
Prudential Active Balanced Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) which were previously purchased and are still owned are also included
in determining the applicable reduction. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held either
directly with the Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment
Letter of Intent, to establish a total investment goal to be achieved by any
number of investments over a thirteen-month period and, in the case of a
Participant Letter of Intent, to establish a minimum eligible employee or
participant goal over a thirteen-month period. Each investment made during the
period will receive the reduced sales charge applicable to the amount
represented by the goal, as if it were a single investment, except in the case
of retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. In the case of a Participant
Letter of Intent, each investment made during the period will be made at net
asset value. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of an Investment Letter of Intent (except in the
case of retirement and group plans) may be back-dated up to 90 days, in order
that any investments made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to
purchase, nor the Company to sell, the indicated amount. Similarly, the
Participant Letter of Intent does not obligate the retirement or group plan to
enroll the indicated number of eligible employees or participants. In the event
the Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such difference.
Investors electing to purchase Class A shares of Prudential Active Balanced Fund
pursuant to a Letter of Intent should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will,
in the case of an Investment Letter of Intent, be granted subject to
confirmation of the investor's holdings or in the case of a Participant Letter
of Intent, subject to confirmation of the number of eligible employees or
participants in the retirement or group plan. Letters of Intent are not
available to individual participants in any retirement or group plans.
B-31
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances
described in the Prospectus of Prudential Active Balanced Fund. See "Shareholder
Guide--How to Sell Your Shares--Waiver of Contingent Deferred Sales
Charges--Class B Shares" in the Prudential Active Balanced Fund Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or, in the
case of a trust, a copy of the grantor's death certificate,
plus a copy of the trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration award letter
disabled if he or she is unable to engage in any or a letter from a physician on the physician's letterhead
substantial gainful activity by reason of any stating the shareholder (or, in the case of a trust, the
medically determinable physical or mental impairment grantor) is permanently disabled. The letter must also
which can be expected to result in death or to be of indicate the date of disability.
long-continued and indefinite duration.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the custodial firm
Account indicating (i) the date of birth of the shareholder and
(ii) that the shareholder is over age 59-1/2 and is taking
a normal distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating
the amount of the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional
documents as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment
Account is established for each investor under which a record of the shares held
is maintained by the Transfer Agent. If a share certificate is desired, it must
be requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. Each Fund makes available
to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable Fund.
An investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholder will receive credit for any contingent deferred sales charge paid in
connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Company makes available to its shareholders the privilege of
exchanging their shares of a Fund for shares of certain other Prudential Mutual
Funds, including one or more specified money market funds, subject in each case
to the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of a Fund. All
exchanges are made on the basis of relative net asset value next determined
after
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receipt of an order in proper form. An exchange will be treated as a redemption
and purchase for tax purposes. Shares may be exchanged for shares of another
fund only if shares of such fund may legally be sold under applicable state
laws. For retirement and group plans having a limited menu of Prudential Mutual
Funds, the Exchange Privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of Prudential Active Balanced Fund may exchange
their Class A shares for shares of certain other Prudential Mutual Funds, shares
of Prudential Government Securities Trust (Short-Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired such
shares upon exchange of Class A shares may use the Exchange Privilege only to
acquire Class A shares of the Prudential Mutual Funds participating in the
Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of Prudential Active Balanced Fund
may exchange their Class B and Class C shares for Class B and Class C shares,
respectively, of certain other Prudential Mutual Funds and shares of Prudential
Special Money Market Fund, Inc. No contingent deferred sales charge (CDSC) will
be payable upon such exchange, but a CDSC may be payable upon the redemption of
the Class B and Class C shares acquired as a result of the exchange. The
applicable sales charge will be that imposed by the fund in which shares were
initially purchased and the purchase date will be deemed to be the date of the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of Prudential Active Balanced Fund may also
be exchanged for shares of Prudential Special Money Market Fund, Inc. without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated without regard to the time such shares were held
in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into Prudential Active Balanced Fund
from a money market fund during the month (and are held in the Fund at the end
of the month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
CLASS I. Class I shares may be exchanged for Class Z shares of other
Prudential Mutual Funds, if the investor is eligible to purchase Class Z shares
of other Prudential Mutual Funds or, if not eligible, the investor may exchange
Class Z shares for Class A shares of other Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for
each of the Prudential Mutual Funds are available from the Fund's Transfer
Agent, Prudential Securities or Prusec.
The Exchange Privilege may be modified, terminated or suspended on 60
days' notice, and any fund, including a Fund, or the Distributor, has the right
to reject any exchange application relating to such fund's shares.
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DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement,
to save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly
investments to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------- --------- -------- --------- --------
25 Years ...................... $ 110 $ 165 $ 220 $ 275
20 Years ...................... 176 264 352 440
15 Years ...................... 296 444 592 740
10 Years ...................... 555 833 1,110 1,388
5 Years ...................... 1,371 2,057 2,742 3,428
- ----------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition,
fees, room and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of a Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
See "Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount
automatically invested in shares of a Fund monthly by authorizing his or her
bank account or Prudential Securities Account (including a Command Account) to
be debited to invest specified dollar amounts in shares of a Fund. The
investor's bank must be a member of the Automatic Clearing House System. Stock
certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus of Prudential
Active Balanced Fund.
In the case of shares held through the Transfer Agent (i) a $10,000
minimum account value applies, (ii) withdrawals may not be for less than $100
and (iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or
income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
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Furthermore, each withdrawal constitutes a redemption of shares, and
any gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, and the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should
consult with their own legal counsel or tax adviser with respect to the
establishment and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
10 years ............................... $ 26,165 $ 31,291
15 years ............................... 44,676 58,649
20 years ............................... 68,109 98,846
25 years ............................... 97,780 157,909
30 years ............................... 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of a Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in the IRA account will be subject to tax when withdrawn from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Company (or a Fund of the Company) may be
included in a mutual fund program with other Prudential Mutual Funds. Under such
a program, a group of portfolios will be selected and thereafter marketed
collectively. Typically, these programs are created with an investment theme,
e.g., to seek greater diversification, protection from interest rate movements
or access to different management styles. In the event such a program is
instituted, there may be a minimum investment requirement for the program as a
whole. A Fund may waive or reduce the minimum initial investment requirements in
connection with such a program.
The mutual funds in the program may be purchased individually or as a
part of a program. Since the allocation of portfolios included in the program
may not be appropriate for all investors, investors should consult their
Prudential Securities Financial Advisor or Prudential/Pruco Securities
Representative concerning the appropriate blend of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.
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NET ASSET VALUE
Portfolio securities of each 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 mean between the last bid and asked prices on such day or at
the bid price on such day in the absence of an asked price; (2) Securities that
are actively traded in the OTC market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing agent or a principal market maker; (3) Securities issued in private
placements are valued at bid prices provided by primary market dealers or, if no
primary dealers are able to provide a bid price, 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 more than 60 days 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, dealer or pricing service; (10) Forward currency exchange
contracts are valued at the current cost of covering or offsetting such
contracts; (11) 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
methodology or provides a valuation or methodology that, in the judgment of the
applicable 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.
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 Pacific securities exchanges and
OTC 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 Pacific 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 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 a Fund's calculation of net asset
values unless, pursuant to procedures adopted by the Trustees, the Subadviser
deems that the particular event would materially affect net asset value, in
which case an adjustment will be made. The New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Holiday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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
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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.
TAXES
The following is a brief summary of some of the more important tax
considerations affecting the Company, the Funds and their 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 Prospectuses 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 intends to
qualify or continue to qualify separately for tax treatment as a regulated
investment company (RIC) under subchapter M of the Internal Revenue Code. If so
qualified, each Fund will not be subject to federal income tax with respect to
its net investment income and net realized capital gains, if any, that are
distributed to its shareholders. In order to qualify for treatment as a RIC,
each Fund will have to meet income diversification, distribution, and certain
other requirements set forth in the Internal Revenue Code. If, in any year, a
Fund should fail to qualify under the Internal Revenue Code 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 income tests require each
Fund to derive (i) 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, securities, or foreign currencies, or
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (Income Requirement) and (ii) 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 those on foreign currencies directly related to the Fund's business
of investing in securities) 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) ("Short-Short Limitation"). Each Fund also must
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) 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 value of the Fund's total assets
and not more than 10% of the outstanding voting securities, and (ii) 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 or the securities of other
RICs).
DISTRIBUTION REQUIREMENT. Each Fund must distribute (or be deemed to
have distributed) 90% or more of its investment company taxable income
(generally consisting of net investment income, net short-term capital gain, and
net gains from certain foreign currency transactions) for each taxable year.
Each Fund also must meet certain other distribution requirements to avoid a 4%
nondeductible excise tax (these requirements are collectively referred to below
as the "RIC distribution requirements").
ZERO COUPON SECURITIES AND ORIGINAL ISSUE DISCOUNT. The Funds may
invest in zero coupon securities and other securities issued with original issue
discount. Such securities generate current income subject to the distribution
requirements without providing cash available for distribution. The Funds do not
anticipate that such investments will adversely affect their ability to meet the
RIC distribution requirements.
FOREIGN INVESTMENTS. If a Fund purchases shares in certain foreign
corporations 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
Internal Revenue Code, then in lieu of the
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foregoing tax and interest, 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 a Fund's investments
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 and the countries in which the
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. Gains or losses
attributable to fluctuations in exchange rates between the time a Fund accrues
dividends, interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities, generally will be treated as
ordinary income or loss. Similarly, gains or losses on the disposition of
foreign currencies or debt securities held by the Fund denominated in a foreign
currency, if any, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates, generally will also be treated as
ordinary income or loss. These gains and losses are referred to under the
Internal Revenue 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 also will 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 investment company
taxable income available for distribution. The Company does not anticipate that
any Section 988 gains and losses the Fund may realize will adversely affect the
ability of the Fund to qualify as a RIC under the Internal Revenue Code.
OPTION AND FUTURES TRANSACTIONS. The use of hedging strategies, such as
writing (selling) and purchasing options and futures contracts and entering into
forward contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses each
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options, futures, and forward contracts derived by a Fund
with respect to its business of investing in stock, securities, or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts thereon, that
are not directly related to the Funds' principal business of investing in stock
or securities (or options and futures with respect thereto) also will be subject
to the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures, and forward contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify as a RIC.
Under Section 1256 of the Internal Revenue Code, gain or loss on
certain options, futures contracts, options on futures contracts (Section 1256
contracts), other than Section 1256 contracts that are part of a "mixed
straddle" with respect to which a Fund has made an election not to have the
following rules apply, 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 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 the RIC distribution requirements.
Offsetting positions held by a Fund involving certain futures and
options transactions may be considered to constitute "straddles" which are
subject to special rules under the Internal Revenue 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.
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TAX CONSEQUENCES TO SHAREHOLDERS
Ordinarily, distributions of a RIC's investment company taxable income
would be taxable to shareholders as ordinary income 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 gain ordinarily would be taxable as long-term
capital gains. The rules discussed in this paragraph generally would apply
regardless of the length of time a shareholder holds the shares of the RIC.
The Company's present intention is to offer shares of the Funds
primarily to qualified retirement plans and other tax-exempt investors to whom
the foregoing rules do not apply. The Funds intend to satisfy the RIC
distribution requirements by distributions in the form of additional shares to
its shareholders. However, shareholders may redeem their shares, including
shares received as dividends or distributions, at any time for cash.
Distributions are generally not taxable to the participants in the shareholder
plans. Distributions from a qualified retirement plan to a participant or
beneficiary are subject to special rules. Because the effect of these rules
varies greatly with individual situations, potential investors are urged to
consult their own tax advisers.
TAX CONSEQUENCES TO NON-EXEMPT SHAREHOLDERS. Dividends and other
distributions declared by a Fund in October, November or December of any year
and payable to shareholders of record on a date in any of those months are
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if the distributions are paid by the Fund during the
following January. Accordingly, those distributions will be taxed to
shareholders that are not tax-exempt entities for the year in which that
December 31 falls.
If shares of a Fund are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Non-exempt investors also should be aware that if shares are purchased shortly
before the record date for a dividend or other distribution, the purchaser will
receive some portion of the purchase price back as a taxable distribution.
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.
AVERAGE ANNUAL TOTAL RETURN
The Fund may from time to time advertise its average annual total
return. Average annual total return is determined separately for Class A, Class
B, Class C, Class Z and Class I shares. See "How the Fund Calculates
Performance" or "How Each Fund Calculates Performance" in the applicable
Prospectus.
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value (ERV) at the end of a 1-, 5- or 10-year
period (or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year period.
Average annual total return takes into account any applicable initial
or contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
The average annual total return for the Class Z shares for the year
ended March 31, 1997 and for the period from commencement of each Fund's
operations (November 5, 1992 for Prudential Stock Index Fund, and January 4,
1993 for Prudential Active Balanced Fund) through March 31, 1997 was: Prudential
Active Balanced Fund, 8.3% and 10.0%, respectively; Prudential Stock Index Fund,
18.9% and 16.7%, respectively. No Class I shares of Prudential Stock Index Fund
were outstanding during this period, nor were any shares of Prudential Small-Cap
Index Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund and
Prudential Europe Index Fund.
B-39
<PAGE>
AGGREGATE TOTAL RETURN
The Fund may also advertise its aggregate total return. Aggregate total
return is determined separately for Class A, Class B, Class C, Class Z and Class
I shares. See "How the Fund Calculates Performance" or "How Each Fund Calculates
Performance" in the applicable Prospectus.
A Fund's aggregate total return represents the cumulative change in the
value of an investment in the Fund for the specified period and is computed by
the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value (ERV) at the end of a 1-, 5- or 10-year
period (or fractional portion thereof) of a hypothetical
$1,000 investment made at the beginning of a 1-, 5- or 10-year
period 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.
Aggregate total return does not take into account any applicable
initial or contingent deferred sales charges or federal or state income taxes
that may be payable upon redemption.
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 one year
period ended March 31, 1997 was 8.3% for Prudential Active Balanced Fund's Class
Z shares and 18.9% for Prudential Stock Index Fund's Class Z shares. For the
period from commencement of each Fund's operations through March 31, 1997, the
aggregate total return was: Prudential Active Balanced Fund, 50.1% and
Prudential Stock Index Fund, 97.3%. The aggregate total return for Prudential
Active Balanced Fund's Class A, Class B and Class C shares for the period from
commencement of offering of each such Class's shares (October 31, 1996) through
March 31, 1997 was -3.6%, -3.6% and 0.3%, respectively. No Class I shares of
Prudential Stock Index Fund were outstanding during this period nor were there
any shares of Prudential Small-Cap Index Fund, Prudential Bond Market Index
Fund, Prudential Europe Index Fund or Prudential Pacific Index Fund.
From time to time, the performance of a Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
[CHART
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Performance
Comparison of
Different
Types of Investments
Over the Long Term
(1/1926-12/1994)
Long-Term Govt.
Common Stocks Bonds Inflation
10.2% 4.8% 3.1%
</TABLE>
- ----------
(1) Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1997
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard and Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used indicator
of broad stock price movements. This chart is for illustrative purposes only and
is not intended to represent the performance of any particular investment or
fund. Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-40
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the 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. Subcustodians provide
custodial services for a Fund's foreign assets held outside the United States.
See "How the Fund is Managed--Custodian and Transfer and Dividend Disbursing
Agent" in the Prospectus.
Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New
Jersey 08837 serves as the Transfer and Dividend Disbursing Agent of each Fund.
PMFS is a wholly owned subsidiary of PIFM. 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. For these services, PMFS receives an annual fee per shareholder
account of $9.50, a new account set-up fee for each manually established account
of $2.00 and a monthly inactive zero balance account fee per shareholder account
of $0.20. PMFS is also reimbursed for its out-of-pocket expenses, including, but
not limited to, postage, stationery, printing, allocable communications expenses
and other costs.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, served as the Company's independent accountants, and in that capacity
audited the annual reports of each then-existing Fund for the fiscal year ended
September 30, 1996. Of the Funds included in the annual report for the fiscal
year ended September 30, 1996, only two, Prudential Active Balanced Fund and
Prudential Stock Index Fund, currently exist. Price Waterhouse LLP, 1177 Avenue
of the Americas, New York, New York 10036, currently serves as the Company's
independent accountants and in that capacity will audit the Funds' annual
financial statements.
B-41
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--79.3%
COMMON STOCKS--46.9%
- ------------------------------------------------------------
Aerospace/Defense--0.3%
5,600 Boeing Co. $ 529,200
- ------------------------------------------------------------
Airlines--2.1%
16,300 AMR Corp.(a) 1,297,887
26,800 Delta Airlines, Inc. 1,929,600
-------------
3,227,487
- ------------------------------------------------------------
Automobiles & Trucks--2.0%
65,500 General Motors Corp. 3,144,000
- ------------------------------------------------------------
Banking--4.2%
19,500 Boatmen's Bancshares 1,089,562
18,400 Chase Manhattan Corp. 1,474,300
48,500 Fleet Financial Group, Inc. 2,158,250
147,000 Hibernia Corp. 1,672,125
-------------
6,394,237
- ------------------------------------------------------------
Business Services--1.4%
23,000 Manpower, Inc. 764,750
49,000 Ryder System, Inc. 1,451,625
-------------
2,216,375
- ------------------------------------------------------------
Chemicals--2.2%
39,100 Betz Laboratories, Inc. 2,052,750
43,100 Dexter Corp. 1,287,612
-------------
3,340,362
- ------------------------------------------------------------
Commercial Services--1.2%
21,850 CUC International, Inc.(a) 871,269
18,900 York International Corp. 914,287
-------------
1,785,556
Computer Software & Services--1.6%
34,700 Geoworks $ 902,200
43,000 Macromedia, Inc.(a) 892,250
13,700 Symbol Technologies, Inc.(a) 630,200
-------------
2,424,650
- ------------------------------------------------------------
Computers--4.0%
29,300 Digital Equipment Corp. 1,047,475
24,000 Hewlett-Packard Co. 1,170,000
31,600 International Business Machines
Corp. 3,934,200
-------------
6,151,675
- ------------------------------------------------------------
Drugs & Medical Supplies--1.3%
15,500 Smithkline Beecham PLC (ADR)
(United Kingdom) 943,563
35,900 Vertex Pharmaceuticals, Inc.(a) 1,059,050
-------------
2,002,613
- ------------------------------------------------------------
Electronics--0.3%
35,600 International Rectifier Corp.(a) 493,950
- ------------------------------------------------------------
Insurance--2.3%
23,400 CIGNA Corp. 2,805,075
14,700 The PMI Group, Inc. 780,938
-------------
3,586,013
- ------------------------------------------------------------
Leisure--0.4%
12,800 ITT Corp. (New) 558,400
- ------------------------------------------------------------
Lodging--0.9%
48,800 Hilton Hotels Corp. 1,384,700
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Machinery--1.2%
13,347 Harnischfeger Industries, Inc. $ 503,849
40,500 Kennametal, Inc. 1,392,188
-------------
1,896,037
- ------------------------------------------------------------
Media--7.5%
81,700 Dow Jones & Co., Inc. 3,022,900
13,800 Dun & Bradstreet Corp. 822,825
45,000 McGraw-Hill Companies, Inc. 1,918,125
78,300 New York Times Co. 2,642,625
19,500 Omnicom Group 911,625
9,200 Scholastic Corp.(a) 667,000
19,000 Tribune Co. 1,482,000
-------------
11,467,100
- ------------------------------------------------------------
Mineral Resources--1.0%
32,574 Newmont Mining Corp. 1,539,122
- ------------------------------------------------------------
Miscellaneous Basic Industry--4.2%
80,550 Avalon Properties, Inc. 1,872,787
16,500 Champion International Corp. 756,938
15,400 Mead Corp. 902,825
27,000 Reynolds Metals Co. 1,380,375
85,300 Westinghouse Electric Corp. 1,588,712
-------------
6,501,637
- ------------------------------------------------------------
Office Equipment & Supplies--0.5%
15,200 Alco Standard Corp. 758,100
Petroleum--1.4%
27,900 Amerada Hess Corp. $ 1,475,213
17,300 Unocal Corp. 622,800
-------------
2,098,013
- ------------------------------------------------------------
Petroleum Services--2.5%
25,200 Anadarko Petroleum Corp. 1,408,050
79,900 Dresser Industries, Inc. 2,377,025
-------------
3,785,075
- ------------------------------------------------------------
Railroads--1.1%
22,461 Union Pacific Corp. 1,645,268
- ------------------------------------------------------------
Retail--1.6%
9,800 Harcourt General, Inc. 541,450
103,679 Limited, Inc. 1,982,861
-------------
2,524,311
- ------------------------------------------------------------
Steel - Producers--0.6%
30,100 USX Corp. -U.S. Steel Group 857,850
- ------------------------------------------------------------
Technology--0.4%
33,320 Chiron Corp.(a) 633,080
- ------------------------------------------------------------
Telecommunications--0.7%
41,200 MCI Communications Corp. 1,055,750
-------------
Total common stocks
(cost $61,594,335) 72,000,561
-------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--32.4%
- ------------------------------------------------------------
U.S. Government Securities--32.4%
$3,230 United States Treasury Bond,
7.875%, 2/15/21 $ 3,527,774
United States Treasury Notes,
6,575 8.875%, 11/15/98 6,925,316
5,510 7.50%, 11/15/01 5,748,473
17,435 6.25%, 2/15/03 17,157,086
17,190 5.75%, 8/15/03 16,397,713
-------------
Total debt obligations
(cost $49,168,316) 49,756,362
-------------
Total long-term investments
(cost $110,762,651) 121,756,923
-------------
SHORT-TERM INVESTMENT--20.3%
- ------------------------------------------------------------
Repurchase Agreement--20.3%
31,159 Joint Repurchase Agreement Account,
5.72%, 10/01/96 (Note 4)
(cost $31,159,000) 31,159,000
- ------------------------------------------------------------
Total Investments--99.6%
(cost $141,921,651; Note 3) 152,915,923
Other assets in excess of
liabilities--0.4% 672,374
-------------
Net Assets--100% $ 153,588,297
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Statement of Assets and Liabilities ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets September 30, 1996
Investments, at value (cost $141,921,651).............................................................. $152,915,923
Cash................................................................................................... 709
Receivable for investments sold........................................................................ 4,101,702
Interest and dividends receivable...................................................................... 786,652
Receivable for Fund shares sold........................................................................ 200,595
Deferred expenses and other assets..................................................................... 20,549
------------------
Total assets....................................................................................... 158,026,130
------------------
Liabilities
Payable for investments purchased...................................................................... 4,175,455
Payable for Fund shares reacquired..................................................................... 98,648
Management fee payable................................................................................. 83,648
Accrued expenses....................................................................................... 63,447
Administration fee payable............................................................................. 16,635
------------------
Total liabilities.................................................................................. 4,437,833
------------------
Net Assets............................................................................................. $153,588,297
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 11,806
Paid-in capital in excess of par.................................................................... 130,668,621
------------------
130,680,427
Undistributed net investment income................................................................. 3,302,693
Accumulated net realized gain on investments........................................................ 8,610,905
Net unrealized appreciation on investments.......................................................... 10,994,272
------------------
Net assets, September 30, 1996......................................................................... $153,588,297
------------------
------------------
Shares of beneficial interest issued and outstanding................................................... 11,806,338
------------------
------------------
Net asset value per share.............................................................................. $13.01
------------------
------------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1996
<S> <C>
Income
Interest.............................. $ 4,497,838
Dividends (net of foreign withholding
taxes of $2,577)................... 1,314,110
------------------
Total income......................... 5,811,948
------------------
Expenses
Management fee........................ 994,182
Administration fee.................... 188,579
Custodian's fees and expenses......... 80,000
Registration fees..................... 40,000
Reports to shareholders............... 34,000
Transfer agent's fees and expenses.... 32,350
Legal fees and expenses............... 15,000
Amortization of organization
expenses........................... 13,249
Audit fee and expenses................ 12,500
Trustees' fees........................ 12,000
Miscellaneous......................... 6,057
------------------
Total expenses....................... 1,427,917
Less: Expense subsidy (Note 2)........... (7,656)
------------------
Net expenses.......................... 1,420,261
------------------
Net investment income.................... 4,391,687
------------------
Realized and Unrealized Gain on
Investment Transactions
Net realized gain on investment
transactions.......................... 9,129,045
Net change in unrealized appreciation on
investments........................... (1,120,181)
------------------
Net gain on investments.................. 8,008,864
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 12,400,551
------------------
------------------
</TABLE>
THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended September 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 4,391,687 $ 3,695,777
Net realized gain on
investment.................. 9,129,045 1,585,229
Net change in unrealized
appreciation on
investments................. (1,120,181) 12,809,504
------------ ------------
Net increase in net assets
resulting from operations... 12,400,551 18,090,510
------------ ------------
Dividends and distributions
Dividends to shareholders from
net investment income....... (3,972,955) (2,260,245)
------------ ------------
Distributions to shareholders
from net realized gains..... (1,932,789) (272,788)
------------ ------------
Fund share transactions
Net proceeds from shares
sold........................ 36,454,403 54,908,716
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 5,905,744 2,533,033
Cost of shares redeemed........ (28,618,544) (20,823,769)
------------ ------------
Net increase in net assets from
Fund share transactions..... 13,741,603 36,617,980
------------ ------------
Net increase...................... 20,236,410 52,175,457
Net Assets
Beginning of year................. 133,351,887 81,176,430
------------ ------------
End of year....................... $153,588,297 $133,351,887
------------ ------------
------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements ACTIVE BALANCED 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 currently consists of two separate funds: Stock Index Fund and Active
Balanced Fund (the ``Fund''). Prior to September 21, 1996 the Company consisted
of seven separate funds, five of which were subsequently reorganized and
combined with existing funds in the Prudential Mutual Funds family of funds (see
Note 6.)
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. (``PIFM''). Investment operations of the
Fund commenced on January 4, 1993. The Fund's investment objective is 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.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: 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 closing bid and asked prices quoted 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 judgement of the subadviser, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.
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 Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- --------------------------------------------------------------------------------
B-47
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services.
PIFM has a subadvisory agreement with Jennison Associates Capital Corp.
(``Jennison'') through October 30, 1996. Jennison furnishes investment advisory
services in connection with the management of the Fund. PIFM will pay for the
costs and expenses attributable to the subadvisory agreements and the salaries
and expenses of all personnel of the Fund except for fees and expenses of
unaffiliated Trustees. The Fund will bear all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .70 of 1% of the average daily net assets of the Fund.
Effective October 31, 1996 the Fund will enter into a management agreement with
Prudential Mutual Fund Management LLC (``PMF''). Pursuant to this agreement PMF
will have responsibility for all investment advisory services. PMF will enter
into a subadvisory agreement with Jennison. Jennison, subject to the supervision
of PMF, will manage the assets of the Fund in accordance with its investment
objectives and policies and in a manner consistent with the previous
arrangement. PMF pays for the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund will bear all
other costs and expenses.
Effective October 31, 1996 the management fee paid PMF will be computed daily
and payable monthly at an annual rate of .65 of 1% of the average daily net
assets of the Fund. Pursuant to the subadvisory agreement, Jennison is
compensated by PMF for its services at an annual rate of .30 of 1% of the Fund's
average daily net assets up to and including $300 million and .25 of 1% of the
Fund's average daily net assets in excess of $300 million.
PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses may be recovered by PIFM through
October 30, 1996 so long as the total expense ratio does not exceed the
predetermined level set forth in the Fund's prospectus of 1.00% per annum. For
the year ended September 30, 1996, PIFM subsidized $7,656 of the expenses of the
Fund (.005% of the average net assets of the Fund/$0.0006 per share).
The Fund has an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF is computed daily and payable monthly, 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 furnish to the Fund such services as the Fund may require in connection
with the administration of the Fund'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 average daily net assets up to $250 million and .02% of the
Company's average daily net assets in excess of $250 million from the
administration fee paid to PMF. PMFS will enter into a separate transfer agency
agreement directly with the Fund.
Effective October 31, 1996 Prudential Securities Incorporated (``PSI'') will
become the distributor of the Fund's Class A, Class B and Class C shares. PSI
will also incur the expenses of distributing the Fund's Class Z shares under the
distribution agreement, none of which is reimbursed by or paid for by the Fund.
Pursuant to plans of distribution (the ``Class A, B and C plans''), the Fund
compensates PSI for distribution-related activities at an annual rate of up to
.30 of 1%, 1% and 1% of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Class A, Class B and Class C plans
will be .25%, 1% and 1%, respectively, of the average daily net assets of the
Fund.
PIFM, Jennison, PMF and PSI are indirect wholly-owned subsidiaries of The
Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1996 aggregated $65,518,520 and $59,659,372,
respectively.
The cost basis of investments for federal income tax purposes is $142,086,519 As
of September 30, 1996, net unrealized appreciation for federal income tax
purposes was $10,829,404 (gross unrealized appreciation--$11,585,277, gross
unrealized depreciation--$755,872).
- --------------------------------------------------------------------------------
B-48
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Note 4. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1996, the Fund
had a 3.12% undivided interest in the repurchase agreements in the joint
account. As of such date, each repurchase agreement in the joint account and the
collateral therefore was as follows:
Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.
J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.
Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.
Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
- ------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the fiscal years ended September 30, 1996 and September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Shares sold.................................. 2,893,381 4,883,689
Shares issued in reinvestment of dividends
and distributions........................... 483,285 242,395
Shares reacquired............................ (2,273,501) (1,856,069)
---------- ----------
Net increase................................. 1,103,165 3,270,015
---------- ----------
---------- ----------
</TABLE>
Of the shares outstanding at September 30, 1996, PIFM and affiliates owned
2,487,564 shares of the Fund.
Note 6. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996 and October 30,
1996.
Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund (``Series'')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.
International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.
Stock Index Fund and the Fund remained with The Prudential Institutional Fund
(to be renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Fund became Class Z shareholders and the Fund will begin
offering Classes A, B and C shares. Stock Index Fund will offer a single class
of shares. Effective October 31, 1996 these funds will be managed by PMF, PMFS
will provide transfer agency services and PSI will act as distributor.
- --------------------------------------------------------------------------------
B-49
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Financial Highlights ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 4,
1993(a)
Year Ended September 30, Through
----------------------------------- September 30,
1996 1995 1994 1993
---------- -------- ------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 12.46 $ 10.92 $ 11.05 $ 10.00
---------- -------- ------- -------
Income from investment operations:
Net investment income(b)........................................... .29 .33 .24 .21
Net realized and unrealized gain (loss) on investment
transactions.................................................... .81 1.54 (.12) .84
---------- -------- ------- -------
Total from investment operations................................ 1.10 1.87 .12 1.05
---------- -------- ------- -------
Less distributions:
Dividends from net investment income............................... (.37) (.29) (.14) --
Distributions from net realized gains.............................. (.18) (.04) (.11) --
---------- -------- ------- -------
Total distributions............................................. (.55) (.33) (.25) --
---------- -------- ------- -------
Net asset value, end of period..................................... $ 13.01 $ 12.46 $ 10.92 $ 11.05
---------- -------- ------- -------
---------- -------- ------- -------
TOTAL RETURN(d).................................................... 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $153,588 $133,352 $81,176 $38,786
Average net assets (000)........................................... $142,026 $104,821 $58,992 $12,815
Ratios to average net assets:(b)
Expenses........................................................ 1.00% 1.00% 1.00% 1.00%(c)
Net investment income........................................... 3.09% 3.53% 3.06% 2.68%(c)
Portfolio turnover rate............................................ 51% 30% 40% 47%
Average commission rate paid per share............................. $ .0654 N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Report to Independent Accountants ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Prudential Institutional Fund--Active Balanced Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Prudential Institutional Fund--Active
Balanced Fund as of September 30, 1996, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the three years in the
period then ended and for the period January 4, 1993 (commencement of investment
operations) to September 30, 1993. These financial statements and financial
highlights are the responsibility of the Portfolio'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, 1996 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 The Prudential
Institutional Fund--Active Balanced Fund as of September 30, 1996, the results
of its operations, the changes in its net assets and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 13, 1996
B-51
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.0%
COMMON STOCKS AND EQUIVALENTS--94.0%
- ------------------------------------------------------------
Aerospace/Defense--2.1%
9,400 Allied-Signal, Inc. $ 619,225
11,500 Boeing Co. 1,086,750
2,100 General Dynamics Corp. 144,638
6,630 Lockheed Martin Corp. 597,529
7,300 McDonnell Douglas Corp. 383,250
1,900 Northrop Grumman Corp. 152,475
7,900 Raytheon Co. 439,437
7,200 Rockwell International Corp. 405,900
-------------
3,829,204
- ------------------------------------------------------------
Airlines--0.3%
2,950 AMR Corp.(a) 234,894
2,600 Delta Airlines, Inc. 187,200
4,700 Southwest Airlines Co. 107,512
2,300 USAir Group, Inc.(a) 37,950
-------------
567,556
- ------------------------------------------------------------
Aluminum--0.4%
7,500 Alcan Aluminum Ltd. 225,000
5,800 Aluminum Co. of America 342,200
2,150 Reynolds Metals Co. 109,919
-------------
677,119
- ------------------------------------------------------------
Automobiles & Trucks--2.0%
24,700 Chrysler Corp. 707,038
1,400 Cummins Engine, Inc. 55,125
3,400 Dana Corp. 102,850
2,000 Echlin Inc. 62,750
39,300 Ford Motor Co. 1,228,125
25,100 General Motors Corp. 1,204,800
4,000 Genuine Parts Co. 175,000
1,400 Johnson Controls, Inc. 105,000
2,420 Navistar International Corp.(a) 20,570
1,900 Safety Kleen Corp. 31,350
-------------
3,692,608
Banking--7.1%
15,030 Banc One Corp. $ 616,230
5,100 Bank of Boston Corp. 295,163
12,800 Bank of New York Co., Inc. 376,000
12,100 BankAmerica Corp. 993,712
2,600 Bankers Trust NY Corp. 204,425
6,200 Barnett Banks, Inc. 209,250
5,300 Boatmen's Bancshares 296,138
14,408 Chase Manhattan Corp. 1,154,441
16,100 Citicorp 1,459,062
3,800 Comerica, Inc. 195,700
7,400 CoreStates Financial Corp. 320,050
3,400 Fifth Third Bancorp 197,625
4,600 First Bank System, Inc. 307,625
10,401 First Chicago Corp. 470,645
9,400 First Union Corp. 627,450
8,587 Fleet Financial Group, Inc. 382,122
1,900 Golden West Financial Corp. 110,913
4,600 Great Western Financial Corp. 121,900
3,800 H.F. Ahmanson & Co. 106,400
7,600 KeyCorp 334,400
4,525 Mellon Bank Corp. 268,106
6,200 Morgan (J.P.) & Co., Inc. 551,025
7,400 National City Corp. 311,725
9,900 NationsBank Corp. 860,062
12,300 Norwest Corp. 502,762
11,300 PNC Bank Corp. 377,138
1,800 Republic New York Corp. 124,425
7,500 Suntrust Banks, Inc. 307,500
5,400 U.S. Bancorp 213,300
3,227 Wells Fargo & Co. 838,933
-------------
13,134,227
- ------------------------------------------------------------
Beverages--3.7%
1,200 Adolph Coors Co. 26,325
16,800 Anheuser Busch Cos., Inc. 632,100
2,400 Brown-Forman Corp. 93,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Beverages (cont'd.)
82,900 Coca-Cola Co. $ 4,217,537
52,100 PepsiCo, Inc. 1,471,825
12,300 Seagram Co., Ltd. 459,713
-------------
6,901,400
- ------------------------------------------------------------
Chemicals--2.2%
3,700 Air Products & Chemicals, Inc. 215,525
8,300 Dow Chemical Co. 666,075
18,600 du Pont (E.I.) de Nemours & Co. 1,641,450
2,600 Eastman Chemical Co. 151,775
3,600 Hercules, Inc. 197,100
19,400 Monsanto Co. 708,100
2,300 Nalco Chemical Co. 83,375
2,200 Rohm & Haas Co. 144,100
1,700 Sigma-Aldrich 96,900
4,400 Union Carbide Corp. 200,750
-------------
4,105,150
- ------------------------------------------------------------
Chemical-Specialty--0.5%
4,625 Engelhard Corp. 106,375
2,100 Great Lakes Chemical Corp. 119,700
4,900 Morton International, Inc. 194,775
5,100 Praxair, Inc. 219,300
1,500 Raychem Corp. 112,500
3,200 W.R. Grace & Co. 166,400
-------------
919,050
- ------------------------------------------------------------
Commercial Services--0.3%
8,150 CUC International, Inc.(a) 324,981
2,800 Deluxe Corp. 105,700
1,000 Harland (John H.) Co. 30,000
3,300 Moore Corp. Ltd. 60,638
-------------
521,319
- ------------------------------------------------------------
Computer Software & Services--4.6%
5,700 3Com Corp. (a) 342,356
1,500 AutoDesk, Inc. 38,813
9,600 Automatic Data Processing, Inc. $ 418,800
6,200 Bay Networks, Inc.(a) 168,950
2,500 Cabletron Systems, Inc.(a) 170,938
2,200 Ceridian Corp.(a) 110,000
21,500 Cisco Systems, Inc.(a) 1,334,344
12,050 Computer Associates International,
Inc. 719,987
2,450 Computer Sciences Corp.(a) 188,344
2,900 Dell Computer Corp. (a) 225,475
7,800 EMC Corp.(a) 176,475
1,300 Intergraph Corp.(a) 14,300
6,900 Micron Technology Inc. 210,450
19,900 Microsoft Corp.(a) 2,624,312
12,700 Novell, Inc.(a) 139,700
21,875 Oracle Systems Corp.(a) 931,055
3,500 Seagate Technology, Inc.(a) 195,562
5,800 Silicon Graphics Inc.(a) 128,325
6,200 Sun Microsystems Inc.(a) 385,175
3,800 Tandem Computers Inc.(a) 40,850
-------------
8,564,211
- ------------------------------------------------------------
Construction--0.1%
2,800 Fluor Corp. 172,200
1,300 Foster Wheeler Corp. 56,875
1,100 Kaufman & Broad Home Corp. 14,300
900 Pulte Corp. 23,063
-------------
266,438
- ------------------------------------------------------------
Consumer Goods--0.6%
900 Centex Corp. 29,363
1,200 Fleetwood Enterprises, Inc. 36,900
5,800 Lowes Companies, Inc. 237,075
5,200 Masco Corp. 156,000
3,500 Maytag Corp. 68,250
1,800 Owens-Corning Fiberglas Corp.(a) 66,375
2,700 Pioneer Hi-Bred International, Inc. 163,350
3,000 Stanley Works 84,375
2,000 Tupperware Corp. 98,000
2,500 Whirlpool Corp. 126,562
-------------
1,066,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Containers--0.1%
1,200 Ball Corp. $ 29,400
1,700 Bemis, Inc. 57,588
4,200 Crown Cork & Seal, Inc.(a) 193,725
-------------
280,713
- ------------------------------------------------------------
Cosmetics & Soaps--2.3%
900 Alberto Culver Co. 39,038
4,400 Avon Products, Inc. 218,350
1,700 Clorox Co. 162,988
4,800 Colgate-Palmolive Co. 417,000
14,700 Gillette Co. 1,060,237
3,650 International Flavors & Fragrances
Inc. 159,231
22,800 Procter & Gamble Co. 2,223,000
-------------
4,279,844
- ------------------------------------------------------------
Diversified Gas--0.2%
3,600 Coastal Corp. 148,500
700 Eastern Enterprises, Inc. 26,425
2,400 Enserch Corp. 50,100
1,700 NICOR Inc. 57,375
900 Oneok Inc. 24,750
-------------
307,150
- ------------------------------------------------------------
Drugs & Medical Supplies--9.1%
26,000 Abbott Laboratories 1,280,500
2,900 ALZA Corp.(a) 77,937
21,100 American Home Products Corp. 1,345,125
8,800 Amgen, Inc.(a) 555,500
1,900 Bard (C.R.), Inc. 59,138
1,800 Bausch & Lomb, Inc. 66,150
9,000 Baxter International, Inc. 420,750
4,200 Becton Dickinson & Co. 185,850
3,800 Biomet, Inc.(a) 62,225
5,900 Boston Scientific Corp.(a) 339,250
16,650 Bristol-Myers Squibb Co. 1,604,644
3,357 Fresenius Medical Care AG (ADR)(a)
(Germany) 78,050
44,300 Johnson & Johnson Co. 2,270,375
18,200 Lilly (Eli) & Co. 1,173,900
8,000 Medtronic, Inc. $ 513,000
40,600 Merck & Co., Inc. 2,857,225
21,400 Pfizer, Inc. 1,693,275
16,955 Pharmacia & Upjohn, Inc. 699,394
12,300 Schering-Plough Corp. 756,450
2,600 St. Jude Medical, Inc.(a) 104,975
2,000 United States Surgical Corp. 85,000
9,000 Warner Lambert Co. 594,000
-------------
16,822,713
- ------------------------------------------------------------
Electronics--4.2%
4,700 Advanced Micro Devices, Inc.(a) 69,325
4,400 Amdahl Corp.(a) 41,525
7,284 AMP Inc. 282,255
4,000 Apple Computer, Inc. 88,750
1,100 Data General Corp.(a) 15,400
5,200 Digital Equipment Corp.(a) 185,900
1,600 EG&G, Inc. 28,600
7,400 Emerson Electric Co. 666,925
4,500 General Instrument Corp.(a) 111,375
1,300 Harris Corp. 84,663
34,000 Hewlett-Packard Co. 1,657,500
27,400 Intel Corp. 2,614,987
4,300 LSI Logic Corp.(a) 99,975
19,700 Motorola, Inc. 1,017,012
4,700 National Semiconductors Corp.(a) 94,588
1,400 Perkin Elmer Corp. 81,025
2,000 Tandy Corp. 80,750
1,000 Tektronix, Inc. 40,875
6,300 Texas Instruments Inc. 347,287
1,300 Thomas & Betts Corp. 53,300
-------------
7,662,017
- ------------------------------------------------------------
Financial Services--2.9%
15,900 American Express Co. 735,375
1,800 Beneficial Corp. 103,500
3,300 Block (H&R), Inc. 98,175
5,458 Dean Witter Discover & Co. 300,190
5,900 Federal Home Loan Mortgage Corp. 577,462
36,200 Federal National Mortgage Assn. 1,262,475
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
7,400 First Data Corp. $ 604,025
4,500 Green Tree Financial Corp. 176,625
3,200 Household International Corp. 263,200
7,425 MBNA Corp. 258,019
5,700 Merrill Lynch & Co., Inc. 374,062
5,000 Morgan Stanley Group, Inc. 248,750
3,500 Salomon, Inc. 159,688
2,250 Transamerica Corp. 157,219
-------------
5,318,765
- ------------------------------------------------------------
Food & Beverage--2.6%
18,035 Archer-Daniels-Midland Co. 347,169
8,300 Campbell Soup Co. 647,400
8,100 ConAgra, Inc. 398,925
4,800 CPC International, Inc. 359,400
1,300 Fleming Cos., Inc. 22,587
5,250 General Mills, Inc. 316,969
2,000 Giant Foods, Inc. 68,000
12,200 Heinz (H.J.) Co. 411,750
5,200 Hershey Foods Corp. 261,300
7,050 Kellogg Co. 485,569
4,500 Quaker Oats Co. 164,812
3,500 Ralston Purina Co. 239,750
16,100 Sara Lee Corp. 575,575
6,000 Sysco Corp. 201,750
3,900 Wrigley (W.M.) Junior Co. 234,975
-------------
4,735,931
- ------------------------------------------------------------
Forest Products--1.5%
1,700 Boise Cascade Corp. 57,800
3,100 Champion International Corp. 142,212
3,050 Georgia Pacific Corp. 241,331
10,017 International Paper Co. 425,717
2,900 James River Corp. 80,113
9,408 Kimberly Clark Corp. 829,080
3,600 Louisiana Pacific Corp. 81,900
1,700 Mead Corp. 99,663
900 Potlatch Corp. 34,875
3,600 Stone Container Corp. 56,250
1,800 Temple Inland Inc. 94,950
2,300 Union Camp Corp. $ 112,413
3,400 Westvaco Corp. 100,725
6,500 Weyerhaeuser Co. 299,812
1,800 Willamette Industries, Inc. 117,900
-------------
2,774,741
- ------------------------------------------------------------
Gas Pipelines--0.7%
5,318 Cinergy Corp. 164,193
1,800 Columbia Gas System, Inc.(a) 100,800
3,100 Consolidated Natural Gas Co. 166,237
8,400 Enron Corp. 342,300
4,700 Noram Energy Corp. 69,913
5,000 PanEnergy Corp. 173,125
1,100 Peoples Energy Corp. 37,400
3,500 Williams Cos., Inc. 178,500
-------------
1,232,468
- ------------------------------------------------------------
Hospital Management--1.0%
3,300 Beverly Enterprises, Inc.(a) 35,888
14,852 Columbia Healthcare Corp. 844,707
1,100 Community Psychiatric Centers 10,313
5,500 Humana, Inc.(a) 111,375
2,100 Manor Care, Inc. 80,588
7,800 Service Corp. International 235,950
900 Shared Medical Systems Corp. 51,300
7,200 Tenet Healthcare Corp.(a) 160,200
6,100 United Healthcare Corp. 253,912
-------------
1,784,233
- ------------------------------------------------------------
Housing Construction
1,200 Armstrong World Industries 74,850
- ------------------------------------------------------------
Insurance--3.7%
4,900 Aetna Life & Casualty Co. 344,838
1,400 Alexander & Alexander Services, Inc. 23,275
14,674 Allstate Corp. 722,694
6,900 American General Corp. 260,475
15,612 American International Group, Inc. 1,572,909
3,600 Aon Corp. 195,300
5,800 Chubb Corp. 266,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Insurance (cont'd.)
2,550 CIGNA Corp. $ 305,681
2,700 General Re Corp. 382,725
3,900 ITT Hartford Group Inc. 230,100
2,325 Jefferson-Pilot Corp. 120,319
3,400 Lincoln National Corp. 149,175
2,400 Marsh & McLennan Cos. 233,100
1,900 MGIC Investment Corp. 128,013
3,100 Providian Corp. 133,300
4,400 SAFECO Corp. 154,000
2,700 St. Paul Cos, Inc. 149,850
2,350 Torchmark Corp. 107,806
15,947 Travelers, Inc. 783,372
2,400 UNUM Corp. 153,900
4,000 USF&G Corp. 74,000
1,150 USLIFE Corp. 34,500
5,500 Wachovia Corp. 272,250
-------------
6,798,382
- ------------------------------------------------------------
Leisure--1.2%
1,800 Bally Entertainment Group(a) 51,075
3,100 Brunswick Corp. 74,400
22,492 Disney (Walt) Co. 1,425,430
3,500 Harrahs Entertainment Inc.(a) 65,188
2,800 Hasbro, Inc. 103,950
3,900 ITT Corp. (New) 170,137
1,300 King World Productions, Inc.(a) 47,938
9,287 Mattel, Inc. 240,301
-------------
2,178,419
- ------------------------------------------------------------
Lodging--0.4%
4,000 HFS Inc.(a) 267,500
6,400 Hilton Hotels Corp. 181,600
4,200 Marriott International, Inc.(a) 231,525
-------------
680,625
- ------------------------------------------------------------
Machinery--1.1%
900 Briggs & Stratton Corp. 39,938
2,400 Case Corp. 117,000
6,400 Caterpillar Inc. $ 482,400
1,400 Cincinnati Milacron, Inc. 26,425
3,600 Cooper Industries, Inc. 155,700
8,700 Deere & Co. 365,400
3,700 Dover Corp. 176,675
2,500 Eaton Corp. 150,937
1,000 Giddings & Lewis, Inc. 11,875
1,600 Harnischfeger Industries, Inc. 60,400
3,600 Ingersoll Rand Co. 171,000
1,302 PACCAR Inc. 71,284
2,550 Parker Hannifin Corp. 107,100
1,950 Snap-On Inc. 62,644
1,000 Timken Co. 39,250
-------------
2,038,028
- ------------------------------------------------------------
Media--1.7%
7,750 Comcast Corp. 119,156
5,100 Donnelley (R.R.) & Sons, Co. 164,475
3,300 Dow Jones & Co., Inc. 122,100
5,600 Dun & Bradstreet Corp. 333,900
4,650 Gannett, Inc. 327,244
2,600 Interpublic Group Cos., Inc. 122,850
3,300 Knight-Ridder, Inc. 122,100
3,300 McGraw Hill, Inc. 140,663
900 Meredith Corp. 44,438
3,100 New York Times Co. 104,625
13,000 Time Warner, Inc. 502,125
3,400 Times Mirror Co. 151,300
2,000 Tribune Co. 156,000
15,500 U.S. West Media Group 261,562
12,139 Viacom Inc.(a) 430,934
-------------
3,103,472
- ------------------------------------------------------------
Mineral Resources--0.8%
1,300 ASARCO Inc. 34,613
12,000 Barrick Gold Corp. (ADR) (Canada) 301,500
3,050 Cyprus Amax Minerals Co. 65,575
4,700 Echo Bay Mines, Ltd. 41,419
6,500 Freeport-McMoRan Copper & Gold Inc. 203,125
4,900 Homestake Mining Co. 71,663
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Mineral Resources (cont'd.)
5,600 INCO, Ltd. $ 172,200
3,298 Newmont Mining Corp. 155,830
2,200 Phelps-Dodge Corp. 141,075
7,900 Placer Dome, Inc. 186,637
4,140 Santa Fe Pacific Gold Corp. 51,750
-------------
1,425,387
- ------------------------------------------------------------
Miscellaneous Basic Industry--4.9%
6,100 Applied Materials, Inc.(a) 168,512
7,000 Browning Ferris Industries, Inc. 175,000
1,000 Crane Co. 44,375
2,200 Ecolab, Inc. 74,250
1,250 FMC Corp.(a) 84,844
55,000 General Electric Co. 5,005,000
1,600 General Signal Corp. 70,400
1,700 Grainger (W.W.) Inc. 119,425
4,000 Illinois Tool Works, Inc. 288,500
3,900 ITT Industries Inc. 94,088
3,800 Loews Corp. 294,025
2,500 Mallinckrodt Group Inc. 104,062
1,400 Millipore Corp. 55,300
250 NACCO Industries, Inc. 11,938
3,733 Pall Corp. 105,457
6,200 PPG Industries, Inc. 337,125
2,800 Textron, Inc. 238,000
900 Trinova Corp. 28,350
2,200 TRW Inc. 204,600
5,000 Tyco International Ltd. 215,625
4,000 United Technologies Corp. 480,500
13,900 Westinghouse Electric Corp. 258,887
16,400 WMX Technologies, Inc. 539,150
-------------
8,997,413
- ------------------------------------------------------------
Miscellaneous Consumer Growth--1.9%
2,100 Allergan, Inc. 80,063
2,400 American Greetings Corp. 68,700
2,900 Black & Decker Corp. 120,350
7,800 Corning, Inc. 304,200
11,400 Eastman Kodak Co. $ 894,900
1,500 Jostens, Inc. 31,313
13,900 Minnesota Mining & Manufacturing Co. 971,262
1,500 Polaroid Corp. 66,000
4,900 Rubbermaid, Inc. 120,050
5,300 Unilever N.V. 835,412
3,500 Whitman Corp. 80,938
-------------
3,573,188
- ------------------------------------------------------------
Office Equipment & Supplies--2.3%
4,300 Alco Standard Corp. 214,462
1,700 Avery Dennison Corp. 94,350
9,000 Compaq Computer Corp.(a) 577,125
4,200 Honeywell, Inc. 265,125
17,800 International Business Machines Corp. 2,216,100
4,900 Pitney Bowes, Inc. 257,862
5,300 Unisys Corp.(a) 32,463
10,750 Xerox Corp. 576,469
-------------
4,233,956
- ------------------------------------------------------------
Petroleum--7.6%
3,100 Amerada Hess Corp. 163,913
16,500 Amoco Corp. 1,163,250
2,200 Ashland Oil, Inc. 87,450
5,350 Atlantic Richfield Co. 682,125
4,200 Burlington Resources Inc. 186,375
21,700 Chevron Corp. 1,358,962
41,250 Exxon Corp. 3,434,062
1,600 Kerr-McGee Corp. 97,400
1,100 Louisiana Land & Exploration Co. 57,888
13,100 Mobil Corp. 1,516,325
10,700 Occidental Petroleum Corp. 250,112
1,500 Pennzoil Co. 79,313
8,700 Phillips Petroleum Co. 371,925
17,800 Royal Dutch Petroleum Co. (ADR)
(Netherlands) 2,779,025
2,900 Santa Fe Energy Resources, Inc.(a) 41,325
2,400 Sun Co., Inc. 55,200
5,700 Tenneco, Inc. 285,712
8,800 Texaco Inc. 809,600
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum (cont'd.)
8,200 Unocal Corp. $ 295,200
9,600 USX Marathon Corp 207,600
1,800 Western Atlas, Inc.(a) 112,050
-------------
14,034,812
- ------------------------------------------------------------
Petroleum Services--0.8%
4,600 Baker Hughes Inc. 139,725
5,900 Dresser Industries, Inc. 175,525
3,800 Halliburton Co. 196,175
900 Helmerich & Payne, Inc. 39,263
1,700 McDermott International, Inc. 36,975
3,400 Oryx Energy Co.(a) 60,350
2,800 Rowan Cos., Inc.(a) 52,150
8,100 Schlumberger, Ltd. 684,450
2,800 Sonat Inc. 123,900
-------------
1,508,513
- ------------------------------------------------------------
Precious Metals
7,500 Battle Mountain Gold Co. 58,125
- ------------------------------------------------------------
Railroads--1.1%
5,065 Burlington Northern Santa Fe 427,359
2,600 Consolidated Rail Corp. 188,175
6,900 CSX Corp. 348,450
4,200 Norfolk Southern Corp. 383,775
8,100 Union Pacific Corp. 593,325
-------------
1,941,084
- ------------------------------------------------------------
Restaurants--0.7%
4,850 Darden Restaurants Inc. 41,831
900 Luby's Cafeterias, Inc. 21,600
23,100 McDonald's Corp. 1,094,362
1,600 Ryan's Family Steak Houses, Inc.(a) 12,200
1,100 Shoney's Inc.(a) 10,038
4,100 Wendy's International, Inc. 88,150
-------------
1,268,181
Retail--5.0%
8,300 Albertsons, Inc. $ 349,637
4,900 American Stores Co. 196,000
3,400 Charming Shoppes, Inc. 20,400
3,200 Circuit City Stores, Inc. 115,600
7,100 Dayton Hudson Corp. 234,300
3,800 Dillard Department Stores, Inc. 122,550
7,000 Federated Department Stores, Inc.(a) 234,500
9,600 Gap, Inc. 277,200
1,200 Great Atlantic & Pacific Tea Inc. 31,050
2,300 Harcourt General, Inc. 127,075
15,966 Home Depot, Inc. 908,066
16,300 Kmart Corp. 167,075
4,100 Kroger Co.(a) 183,475
8,988 Limited, Inc. 171,896
2,400 Liz Claiborne, Inc. 89,400
600 Longs Drug Stores Corp. 26,100
8,300 May Department Stores Co. 403,587
3,500 Melville Corp. 154,438
1,200 Mercantile Stores, Inc. 64,800
5,300 Newell Co. 159,000
4,700 NIKE, Inc. 571,050
2,800 Nordstrom, Inc. 106,400
7,500 Penney (J.C.), Inc. 405,937
2,100 Pep Boys - Manny, Moe & Jack 74,813
6,552 Price Costco, Inc.(a) 134,316
2,400 Reebok International, Ltd. 83,400
2,800 Rite-Aid Corp. 101,500
13,000 Sears Roebuck & Co. 581,750
2,800 Sherwin Williams Co. 129,850
1,100 Stride Rite Corp. 9,900
2,400 Supervalue, Inc. 66,000
2,400 TJX Companies, Inc. 86,100
9,100 Toys 'R' Us Inc.(a) 265,037
76,200 Wal-Mart Stores, Inc. 2,009,775
8,200 Walgreen Co. 303,400
5,000 Winn-Dixie Stores, Inc. 174,375
4,300 Woolworth Corp. 88,688
-------------
9,228,440
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Rubber--0.2%
2,800 Cooper Tire & Rubber $ 60,550
1,800 Goodrich (B.F.) Co. 81,225
5,200 Goodyear Tire & Rubber Co. 239,850
-------------
381,625
- ------------------------------------------------------------
Steel - Producers--0.3%
5,673 Allegheny Teldyne Inc. 128,340
3,800 Armco Inc.(a) 17,100
3,700 Bethlehem Steel Corp.(a) 37,000
1,800 Inland Steel Industries, Inc. 32,175
2,900 Nucor Corp. 147,175
2,900 USX Corp. - U.S. Steel Group 82,650
2,850 Worthington Industries, Inc. 57,000
-------------
501,440
- ------------------------------------------------------------
Telecommunications--1.4%
6,200 ALLTEL Corp. 172,825
1,925 Andrew Corp.(a) 96,009
4,000 DSC Communications Corp.(a) 100,000
23,100 MCI Communications Corp. 591,937
8,600 Northern Telecom Ltd. 496,650
2,400 Scientific Atlanta, Inc. 38,100
14,400 Sprint Corp. 559,800
21,400 Tele-Communications, Inc.(a) 319,663
3,000 Tellabs, Inc.(a) 211,875
-------------
2,586,859
- ------------------------------------------------------------
Textiles--0.2%
2,600 Fruit of the Loom, Inc.(a) 80,600
1,500 National Service Industries, Inc. 52,500
1,200 Russell Corp. 38,700
700 Springs Industries, Inc. 31,150
2,100 VF Corp. 126,263
-------------
329,213
- ------------------------------------------------------------
Tobacco--1.6%
5,700 American Brands Inc. 240,825
27,450 Philip Morris Cos., Inc. $ 2,463,637
6,500 UST, Inc. 192,563
-------------
2,897,025
- ------------------------------------------------------------
Trucking & Shipping--0.2%
1,200 Caliber Systems Inc. 19,350
1,600 Consolidated Freightways, Inc. 39,200
1,900 Federal Express Corp.(a) 150,575
10,100 Laidlaw Inc. 111,100
2,600 Ryder System, Inc. 77,025
800 Yellow Corp. 10,400
-------------
407,650
- ------------------------------------------------------------
Utility Communications--5.7%
16,500 AirTouch Communications(a) 455,813
18,300 Ameritech Corp. 963,037
53,600 AT&T Corp. 2,800,600
14,500 Bell Atlantic Corp. 868,187
33,100 BellSouth Corp. 1,224,700
32,200 GTE Corp. 1,239,700
14,500 NYNEX Corp. 630,750
14,300 Pacific Telesis Group 480,837
20,200 SBC Communications Inc. 972,125
15,900 U.S. West Communications Group 473,025
7,300 Unicom Corp. 183,413
12,900 WorldCom Inc.(a) 275,738
-------------
10,567,925
- ------------------------------------------------------------
Utilities - Electric--2.7%
6,300 American Electric Power, Inc. 255,937
5,000 Baltimore Gas & Electric Co. 130,625
5,100 Carolina Power & Light Co. 175,950
6,900 Central & South West Corp. 179,400
7,900 Consolidated Edison Co. 219,225
6,000 Dominion Resources, Inc. 226,500
4,700 DTE Energy Co. 131,600
6,800 Duke Power Co. 317,050
14,800 Edison International 264,550
7,600 Entergy Corp. 205,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utilities - Electric (cont'd.)
6,100 FPL Group, Inc. $ 263,825
3,900 General Public Utilities Corp. 119,925
8,800 Houston Industries, Inc. 194,700
4,700 Niagara Mohawk Power Corp. 37,600
2,300 Northern States Power Co. 107,238
4,900 Ohio Edison Co. 94,938
2,700 Pacific Enterprises 81,675
13,800 Pacific Gas & Electric Co. 300,150
9,800 Pacificorp 202,125
7,300 PECO Energy Co. 173,375
5,200 PP & L Resources Inc. 113,750
8,000 Public Service Enterprise Group 214,000
22,400 Southern Co. 506,800
7,500 Texas Utilities Co. 297,187
3,300 Union Electric Co. 121,687
-------------
4,935,012
-------------
Total common stocks
(cost $137,197,051) 173,192,731
- ------------------------------------------------------------
Preferred Stock
Insurance
367 Aetna Life & Casualty Co.
(cost $23,902) 26,745
-------------
Total stocks
(cost $137,220,953) 173,219,476
SHORT-TERM INVESTMENTS--6.0%
- ------------------------------------------------------------
U.S. Government Securities--0.3%
United States Treasury Bills,
$ 100(b) 5.05%, 12/19/96 $ 98,892
400 5.11%, 12/19/96 395,519
-------------
Total U.S. Government Securities
(cost $494,411) 494,411
- ------------------------------------------------------------
Repurchase Agreement--5.7%
10,590 Joint Repurchase Agreement Account,
5.70%, 10/01/96 (Note 4)
(cost $10,590,000) 10,590,000
-------------
Total short-term investments
(cost $11,084,411) 11,084,411
- ------------------------------------------------------------
Total Investments--100.0%
(cost $148,305,364; Note 3) 184,303,887
Other assets in excess of liabilities 74,629
-------------
Net Assets--100% $ 184,378,516
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Statement of Assets and Liabilities STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets September 30, 1996
Investments, at value (cost $148,305,364)............................................................... $184,303,887
Cash.................................................................................................... 141
Receivable for Fund shares sold......................................................................... 987,571
Interest and dividends receivable....................................................................... 333,902
Deferred expenses and other assets...................................................................... 52,660
Receivable for investments sold......................................................................... 32,681
------------------
Total assets......................................................................................... 185,710,842
------------------
Liabilities
Payable for investments purchased....................................................................... 842,997
Payable for Fund shares reacquired...................................................................... 331,310
Accrued expenses........................................................................................ 114,637
Management fee payable-net.............................................................................. 23,057
Administration fee payable.............................................................................. 19,475
Due to broker - variation margin........................................................................ 850
------------------
Total liabilities.................................................................................... 1,332,326
------------------
Net Assets.............................................................................................. $184,378,516
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................ $ 11,480
Paid-in capital in excess of par..................................................................... 144,874,735
------------------
144,886,215
Undistributed net investment income.................................................................. 2,125,171
Accumulated net realized gain on investments......................................................... 1,352,382
Net unrealized appreciation on investments........................................................... 36,014,748
------------------
Net assets, September 30, 1996.......................................................................... $184,378,516
------------------
------------------
Shares of beneficial interest issued and outstanding.................................................... 11,480,178
------------------
------------------
Net asset value per share............................................................................... $16.06
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
STOCK INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1996
<S> <C>
Income
Interest................................. $ 444,547
Dividends (net of foreign withholding
taxes of $20,498)..................... 3,154,570
------------------
Total income.......................... 3,599,117
------------------
Expenses
Management fee........................... 570,160
Administration fee....................... 188,037
Custodian's fees and expenses............ 170,000
Reports to shareholders.................. 50,000
Registration fees........................ 42,000
Transfer agent's fees and expenses....... 33,752
Legal fees and expenses.................. 15,000
Amortization of organization expenses.... 13,421
Trustees' fees........................... 12,000
Audit fee and expenses................... 11,500
Miscellaneous............................ 5,624
------------------
Total expenses........................ 1,111,494
Less: Expense subsidy (Note 2).............. (256,185)
------------------
Net expenses.......................... 855,309
------------------
Net investment income....................... 2,743,808
------------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on:
Investment transactions.................. 685,464
Financial futures contracts.............. 1,106,100
------------------
1,791,564
------------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 20,470,266
Financial futures contracts.............. (177,000)
------------------
20,293,266
------------------
Net gain on investments..................... 22,084,830
------------------
Net Increase in Net Assets
Resulting from Operations................... $ 24,828,638
------------------
------------------
</TABLE>
THE PRUDENTIAL INSTITUTIONAL FUND
STOCK INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended September 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 2,743,808 $ 1,829,951
Net realized gain on investment
transactions................ 1,791,564 4,044,854
Net change in unrealized
appreciation on
investments................. 20,293,266 13,914,900
------------ ------------
Net increase in net assets
resulting from operations... 24,828,638 19,789,705
------------ ------------
Dividends and distributions
Dividends to shareholders from
net investment income....... (2,181,628) (1,015,394)
Distributions to shareholders
from net realized gains..... (4,441,170) (165,297)
------------ ------------
Total dividends and
distributions............... (6,622,798) (1,180,691)
------------ ------------
Fund share transactions
Net proceeds from shares
sold........................ 113,692,034 52,960,096
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 6,622,798 1,180,691
Cost of shares redeemed........ (56,086,722) (20,924,559)
------------ ------------
Net increase in net assets from
Fund shares transactions.... 64,228,110 33,216,228
------------ ------------
Net increase...................... 82,433,950 51,825,242
Net Assets
Beginning of year................. 101,944,566 50,119,324
------------ ------------
End of year....................... $184,378,516 $101,944,566
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements STOCK INDEX 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 currently consists of two separate funds: Stock Index Fund (the
``Fund'') and Active Balanced Fund. Prior to September 21, 1996 the Company
consisted of seven separate funds, five of which were subsequently reorganized
and combined with existing funds in the Prudential Mutual Funds family of funds
(see Note 6).
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. (``PIFM''). Investment operations of the
Fund commenced on November 5, 1992. The Fund's investment objective seeks to
provide investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: 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 closing bid and asked prices quoted 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 judgement of one of the subadvisers, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin.'' Subsequent payments, known as ``variation
margin,'' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge their existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value. Under a variety of circumstances, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and
- --------------------------------------------------------------------------------
B-63
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements STOCK INDEX FUND
- --------------------------------------------------------------------------------
net capital gains, if any, at least annually. Dividends and distributions are
recorded on the ex-dividend date.
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 Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services.
PIFM has a subadvisory agreement with The Prudential Investment Corporation
(``PIC'') through October 30, 1996. PIC furnishes investment advisory services
in connection with the management of the Fund. PIFM will pay for the costs and
expenses attributable to the subadvisory agreement and the salaries and expenses
of all personnel of the Fund except for fees and expenses of unaffiliated
Trustees. The Fund will bear all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .40 of 1% of the average daily net assets of the Fund.
Effective October 31, 1996 the Fund will enter a management agreement with
Prudential Mutual Fund Management LLC (``PMF''). Pursuant to this agreement PMF
will have responsibility for all investment advisory services. PMF will enter
into a subadvisory agreement with PIC. PIC, subject to the supervision of PMF,
will manage the assets of the Fund in accordance with its investment objectives
and policies and in a manner consistent with the previous agreement. PMF will
pay for the costs and expenses attributable to the subadvisory agreement and the
salaries and expenses of all personnel of the Fund except for fees and expenses
of unaffiliated Trustees.
Effective October 31, 1996 the management fee paid PMF will be computed daily
and payable monthly at an annual rate of .30 of 1% of the average daily net
assets of the Fund.
PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses may be recovered by PIFM through
October 30, 1996 so long as the total expense ratio does not exceed the
predetermined level set forth in the Fund's prospectus of .60% per annum. For
the year ended September 30, 1996, PIFM subsidized $256,185 of the expenses of
the Fund (.18% of the average net assets of the Fund/$.022 per share).
The Fund has an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF will be computed daily and payable monthly, 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 furnish to the Fund such services as the Fund may require in connection
with the administration of the Fund's business affairs. PMF will also provide
certain transfer agent services through its wholly-owned subsidiary, Prudential
Mutual Fund Services, Inc. (``PMFS''). For such services, PMFS will be paid .03%
of the Company's daily net assets up to $250 million and .02% of the Company's
average daily net assets in excess of $250 million from the administration fee
paid to PMF. Upon termination of the administration agreement, PMFS will enter
into a separate transfer agency agreement directly with the Fund.
Effective October 31, 1996 Prudential Securities Incorporated (``PSI'') will
become the distributor of the Fund's shares. Under the distribution agreement,
PSI will incur the expenses of distributing the Fund's shares, none of which is
reimbursed by or paid for by the Fund.
PIFM, PIC, PMF and PSI are indirect wholly-owned subsidiaries of the Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1996 aggregated $71,134,529 and $2,335,704,
respectively.
- --------------------------------------------------------------------------------
B-64
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements STOCK INDEX FUND
- --------------------------------------------------------------------------------
On September 30, 1996, the Stock Index Fund purchased 16 financial futures
contracts on the S&P 500 Index expiring December, 1996. The cost of such
contracts was $10,700,475. The value of such contracts on September 30, 1996 was
$10,716,700, thereby resulting in an unrealized gain of $16,225.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of September
30, 1996, net unrealized appreciation for federal income tax purposes was
$35,953,398 (gross unrealized appreciation--$38,097,945 gross unrealized
depreciation--$2,144,547).
- ------------------------------------------------------------
Note 4. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1996, the Fund
had a 1.06% undivided interest in the repurchase agreements in the joint
account. The undivided interest represented $10,590,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the collateral
therefor was as follows:
Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.
J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.
Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.
Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
- ------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the fiscal years ended September 30, 1996 and September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Shares sold.................................. 7,589,233 4,340,797
Shares issued in reinvestment of dividends
and
distributions............................... 467,712 107,238
Shares reacquired............................ (3,745,568) (1,725,892)
---------- ----------
Net increase................................. 4,311,377 2,722,143
---------- ----------
---------- ----------
</TABLE>
Of the shares outstanding at September 30, 1996, PIFM and affiliates owned
5,017,951 shares of the Fund.
- ------------------------------------------------------------
Note 6. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996 and October 31,
1996.
Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund (``Series'')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.
International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.
Active Balanced Fund and the Fund remained with The Prudential Institutional
Fund (to be renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Active Balanced Fund became Class Z shareholders and Active
Balanced Fund will begin offering Classes A, B and C shares. The Fund will offer
a single class of shares. Effective October 31, 1996 these funds will be managed
by PMF, PMFS will provide transfer agency services and PSI will act as
distributor.
- --------------------------------------------------------------------------------
B-65
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Financial Highlights STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 5,
1992(a)
Year Ended September 30, Through
--------------------------------- September 30,
1996 1995 1994 1993
-------- -------- ------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 14.22 $ 11.27 $ 11.12 $ 10.00
-------- -------- ------- -------------
Income from investment operations:
Net investment income (b)............................. .25 .23 .26 .23
Net realized and unrealized gain on investment
transactions....................................... 2.44 2.97 .11 .94
-------- -------- ------- -------------
Total from investment operations.................... 2.69 3.20 .37 1.17
-------- -------- ------- -------------
Less distributions:
Dividends from net investment income.................. (.28) (.22) (.18) (.05)
Distributions from net realized gains................. (.57) (.03) (.04) --
-------- -------- ------- -------------
Total distributions................................. (.85) (.25) (.22) (.05)
-------- -------- ------- -------------
Net asset value, end of period........................ $ 16.06 $ 14.22 $ 11.27 $ 11.12
-------- -------- ------- -------------
-------- -------- ------- -------------
TOTAL RETURN(d)....................................... 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $184,379 $101,945 $50,119 $ 27,142
Average net assets (000).............................. $142,540 $ 71,711 $38,098 $ 18,807
Ratios to average net assets: (b)
Expenses............................................ .60% .60% .60% .60%(c)
Net investment income............................... 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate............................... 2% 11% 2% 1%
Average commission rate paid per share................ $ 0.0250 N/A N/A N/A
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total return for periods of less than a full year are
not annualized. Total return includes the effect of expense subsidies.
N/A--Data not required for these periods.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Report of Independent Accountants STOCK INDEX FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Prudential Institutional Fund--Stock Index Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Prudential Institutional Fund--Stock Index
Fund as of September 30, 1996, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for the three years in the period then
ended and for the period November 5, 1992 (commencement of investment
operations) to September 30, 1993. These financial statements and financial
highlights are the responsibility of the Portfolio'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, 1996 by correspondence with the custodian and brokers. 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 The Prudential
Institutional Fund--Stock Index Fund as of September 30, 1996, the results of
its operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
November 13, 1996
B-67
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) ACTIVE BALANCED FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--81.9%
COMMON STOCKS--46.0%
- ----------------------------------------------------------------
AIRLINES--1.3%
22,800 Delta Airlines, Inc. $ 1,918,050
- ----------------------------------------------------------------
AUTOMOBILES & TRUCKS--3.2%
57,000 General Motors Corp. 3,156,375
27,000 General Motors Corp., Class H 1,464,750
-------------
4,621,125
- ----------------------------------------------------------------
BANKING--2.9%
11,500 Chase Manhattan Corp. 1,076,687
22,800 Fleet Financial Group, Inc. 1,305,300
144,400 Hibernia Corp. 1,895,250
-------------
4,277,237
- ----------------------------------------------------------------
BUSINESS SERVICES--0.5%
20,300 Manpower, Inc. 730,800
- ----------------------------------------------------------------
CHEMICALS--2.1%
27,300 Betz Laboratories, Inc. 1,723,312
43,100 Dexter Corp. 1,298,388
-------------
3,021,700
- ----------------------------------------------------------------
CHEMICALS-SPECIALTY--1.7%
82,100 Engelhard Corp. 1,724,100
17,500 Morton International, Inc. 739,375
-------------
2,463,475
- ----------------------------------------------------------------
COMMERCIAL SERVICES--1.7%
35,375 CUC International Inc.(a) 795,937
49,800 Ogden Corp. 1,052,025
15,100 York International Corp. 632,313
-------------
2,480,275
- ----------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--0.4%
13,700 Symbol Technologies, Inc.(a) $ 661,025
- ----------------------------------------------------------------
COMPUTERS--2.8%
18,200 Hewlett-Packard Co. 969,150
17,200 International Business Machines
Corp. 2,362,850
112,600 Unisys Corp.(a) 717,825
-------------
4,049,825
- ----------------------------------------------------------------
DRUGS & MEDICAL SUPPLIES--1.2%
30,500 Pharmacia & Upjohn, Inc. 1,117,063
15,100 Vertex Pharmaceuticals, Inc.(a) 611,550
-------------
1,728,613
- ----------------------------------------------------------------
ELECTRONICS--0.3%
35,600 International Rectifier Corp.(a) 422,750
- ----------------------------------------------------------------
INDUSTRIAL TECHNOLOGY/INSTRUMENTS--1.0%
33,000 Millipore Corp. 1,398,375
- ----------------------------------------------------------------
INSURANCE--2.3%
22,800 CIGNA Corp. 3,331,650
- ----------------------------------------------------------------
LODGING--0.6%
36,500 Hilton Hotels Corp. 885,125
- ----------------------------------------------------------------
MACHINERY--1.6%
15,000 Case Corp. 761,250
8,800 Caterpillar Inc. 706,200
22,300 Kennametal, Inc. 808,375
-------------
2,275,825
</TABLE>
- -----------------------------------------------------------------
See Notes to Financial Statements.
B-68
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) ACTIVE BALANCED FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
MEDIA--5.1%
42,900 McGraw-Hill Companies, Inc. $ 2,193,263
66,700 New York Times Co. 2,943,137
8,600 Omnicom Group 428,925
47,800 Tribune Co. 1,935,900
-------------
7,501,225
- ----------------------------------------------------------------
MINERAL RESOURCES--1.8%
30,200 ASARCO Inc. 849,375
44,474 Newmont Mining Corp. 1,723,367
-------------
2,572,742
- ----------------------------------------------------------------
MISCELLANEOUS BASIC INDUSTRY--4.0%
39,450 Avalon Properties, Inc. 1,084,875
19,900 Champion International Corp. 905,450
28,700 Reynolds Metals Co. 1,779,400
118,900 Westinghouse Electric Corp. 2,110,475
-------------
5,880,200
- ----------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES--0.7%
17,400 Xerox Corp. 989,625
- ----------------------------------------------------------------
PETROLEUM--2.1%
26,200 Amerada Hess Corp. 1,388,600
60,823 Union Pacific Resources Group, Inc. 1,627,015
-------------
3,015,615
- ----------------------------------------------------------------
PAPER--0.7%
32,900 Boise Cascade Corp. $ 1,003,450
- ----------------------------------------------------------------
PETROLEUM SERVICES--2.6%
27,200 Anadarko Petroleum Corp. 1,526,600
76,700 Dresser Industries, Inc. 2,320,175
-------------
3,846,775
- ----------------------------------------------------------------
PUBLISHING--0.7%
31,400 American Greetings Corp. 1,002,838
- ----------------------------------------------------------------
RAILROADS--0.6%
14,961 Union Pacific Corp. 849,037
- ----------------------------------------------------------------
RETAIL--1.4%
115,179 Limited, Inc. 2,116,414
- ----------------------------------------------------------------
STEEL-PRODUCERS--0.7%
40,000 USX Corp. -U.S. Steel Group 1,065,000
- ----------------------------------------------------------------
TELECOMMUNICATIONS--0.8%
32,100 MCI Communications Corp. 1,143,563
- ----------------------------------------------------------------
TRUCKING & SHIPPING--1.2%
58,800 Ryder System, Inc. 1,719,900
-------------
Total common stocks
(cost $56,956,080) 66,972,234
-------------
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-69
<PAGE>
THE PRUDENTIAL DRYDEN FUND
ACTIVE BALANCED FUND
PORTFOLIO OF INVESTMENTS AS OF
MARCH 31, 1997 (UNAUDITED)
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
DEBT OBLIGATIONS--35.9%
- ----------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--35.9%
$5,030 United States Treasury Bond,
7.875%, 2/15/21 $ 5,389,947
United States Treasury Notes,
6,575 8.875%, 11/15/98 6,823,600
5,510 7.50%, 11/15/01 5,665,823
17,435 6.25%, 2/15/03 16,960,942
18,480 5.75%, 8/15/03 17,443,457
-------------
Total debt obligations
(cost $52,515,892) 52,283,769
-------------
Total long-term investments
(cost $109,471,972) 119,256,003
-------------
SHORT-TERM INVESTMENTS--16.9%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT--16.9%
24,526 Joint Repurchase Agreement Account,
6.438%, 04/01/97 (Note 4)
(cost $24,526,000) 24,526,000
- ----------------------------------------------------------------
TOTAL INVESTMENTS--98.8%
(cost $133,997,972; Note 3) 143,782,003
Other assets in excess of
liabilities--1.2% 1,799,284
-------------
Net Assets--100% $ 145,581,287
=============
</TABLE>
- ---------------
(a) Non-income producing security.
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-70
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES THE PRUDENTIAL DRYDEN FUND
(UNAUDITED) ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS March 31, 1997
--------------
<S> <C>
Investments, at value (cost $133,997,972).................................................................. $143,782,003
Cash....................................................................................................... 744
Receivable for investments sold............................................................................ 1,135,065
Dividends and interest receivable.......................................................................... 799,847
Receivable for Fund shares sold............................................................................ 365,507
Other assets............................................................................................... 12,959
-------------
Total assets........................................................................................... 146,096,125
-------------
LIABILITIES
Payable for Fund shares reacquired......................................................................... 377,199
Management fee payable..................................................................................... 82,138
Payable for investments purchased.......................................................................... 6,012
Distribution fee payable................................................................................... 28
Accrued expenses........................................................................................... 49,461
-------------
Total liabilities...................................................................................... 514,838
-------------
NET ASSETS................................................................................................. $145,581,287
=============
Net assets were comprised of:
Common stock, at par.................................................................................... $ 11,674
Paid-in capital in excess of par........................................................................ 128,913,040
-------------
128,924,714
Undistributed net investment income..................................................................... 1,025,019
Accumulated net realized gain on investments............................................................ 5,847,523
Net unrealized appreciation on investments.............................................................. 9,784,031
-------------
Net assets, March 31, 1997................................................................................. $145,581,287
=============
Class A:
Net asset value and redemption price per share
($2,228.10 / 178.886 shares of common stock issued and outstanding).................................. $12.46
Maximum sales charge (5.0% of offering price)........................................................... .65
------
Maximum offering price to public........................................................................ $13.11
======
Class B:
Net asset value, offering price and redemption price per share
($50,245 / 4,041 shares of common stock issued and outstanding)...................................... $12.43
======
Class C:
Net asset value, offering price and redemption price per share
($196.77 / 15.827 shares of common stock issued and outstanding)..................................... $12.43
======
Class Z:
Net asset value, offering price and redemption price per share
($145,528,617 / 11,670,294 shares of common stock issued and outstanding)............................ $12.47
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-71
<PAGE>
THE PRUDENTIAL DRYDEN FUND
ACTIVE BALANCED FUND
STATEMENT OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
NET INVESTMENT INCOME MARCH 31, 1997
--------------
<S> <C>
Income
Interest................................. $ 2,437,209
Dividends (net of foreign withholding
taxes of $522)........................ 663,573
-------------
Total income............................ 3,100,782
-------------
Expenses
Distribution fee--Class A................ 2
Distribution fee--Class B................ 33
Distribution fee--Class C................ 1
Management fee........................... 514,076
Transfer agent's fees and expenses....... 61,700
Registration fees........................ 50,000
Custodian's fees and expenses............ 43,000
Reports to shareholders.................. 22,500
Administration fee....................... 21,553
Legal fees............................... 10,500
Audit fee................................ 10,000
Organization expense..................... 6,588
Directors' fees.......................... 5,000
Miscellaneous............................ 5,689
-------------
Total expenses.......................... 750,642
-------------
Net investment income....................... 2,350,140
-------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENT TRANSACTIONS
Net realized gain on investment
transactions............................. 6,492,245
Net change in unrealized appreciation on
investments.............................. (1,210,241)
-------------
Net gain on investments..................... 5,282,004
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................... $ 7,632,144
=============
</TABLE>
THE PRUDENTIAL DRYDEN FUND
ACTIVE BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
INCREASE MARCH 31, SEPTEMBER 30,
IN NET ASSETS 1997 1996
------------ -------------
<S> <C> <C>
Operations
Net investment income.......... $ 2,350,140 4,391,687
Net realized gain on
investment.................. 6,492,245 9,129,045
Net change in unrealized
appreciation on
investments................. (1,210,241) (1,120,181)
------------ -------------
Net increase in net assets
resulting from operations... 7,632,144 12,400,551
------------ -------------
Dividends and distributions
Dividends to shareholders from
net investment income
Class A..................... (64) --
Class B..................... (6) --
Class C..................... (6) --
Class Z..................... (4,627,738) (3,972,955)
------------ -------------
(4,627,814) (3,972,955)
------------ -------------
Distributions to shareholders
from net realized gains
Class A..................... (128) --
Class B..................... (12) --
Class C..................... (12) --
Class Z..................... (9,255,475) (1,932,789)
------------ -------------
(9,255,627) (1,932,789)
------------ -------------
Fund share transactions
Net proceeds from shares
sold........................ 36,626,039 36,454,403
Net asset value of shares
issued to shareholders in
reinvestment of
distributions............... 13,883,406 5,905,744
Cost of shares reacquired...... (52,265,158) (8,618,544)
------------ -------------
Net increase (decrease) in net
assets from Fund share
transactions................ (1,755,713) 13,741,603
------------ -------------
Total increase (decrease)......... (8,007,010) 20,236,410
NET ASSETS
Beginning of period............... 153,588,297 133,351,887
------------ -------------
End of period..................... $145,581,287 $ 153,588,297
============ =============
</TABLE>
- -----------------------------------------------------------------
See Notes to Financial Statements.
B-72
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE PRUDENTIAL DRYDEN FUND
(UNAUDITED) ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Prudential Dryden 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
currently consists of two separate funds: Stock Index Fund and Active Balanced
Fund (the "Fund"). Prior to October 28, 1996 the Company was named the
Prudential Institutional Fund and prior to September 20, 1996, it consisted of
seven separate funds, five of which were reorganized on September 20, 1996 and
combined with existing funds in the Prudential Mutual Funds family of funds (see
Note 6.)
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. ("PIFM"). Investment operations of the Fund
commenced on January 4, 1993. The Fund's investment objective is 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.
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: 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 closing bid and asked prices quoted 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 judgement of the subadviser, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.
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 Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- --------------------------------------------------------------------------------
B-73
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE PRUDENTIAL DRYDEN FUND
(UNAUDITED) ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund had a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM had responsibility for all investment advisory services
and supervises the subadviser's performance of such services.
PIFM had a subadvisory agreement with Jennison Associates Capital Corp.
("Jennison") through October 30, 1996. Jennison furnished investment advisory
services in connection with the management of the Fund. PIFM paid for the costs
and expenses attributable to the subadvisory agreements and the salaries and
expenses of all personnel of the Fund except for fees and expenses of
unaffiliated Trustees. The Fund paid for all other costs and expenses.
Through October 30, 1996 the management fee paid PIFM was computed daily and
payable monthly at an annual rate of .70 of 1% of the average daily net assets
of the Fund. Effective October 31, 1996 the management fee paid PMF was computed
daily and payable monthly at an annual rate of .65 of 1% of the average daily
net assets of the Fund. Pursuant to the subadvisory agreement, Jennison was
compensated by PMF for its services at an annual rate of .30 of 1% of the Fund's
average daily net assets up to and including $300 million and .25 of 1% of the
Fund's average daily net assets in excess of $300 million.
Effective October 31, 1996 the Fund entered into a management agreement with
Prudential Investments Fund Management LLC ("PMF"). Pursuant to this agreement
PMF has responsibility for all investment advisory services. PMF entered into a
subadvisory agreement with Jennison. Jennison, subject to the supervision of
PMF, manages the assets of the Fund in accordance with its investment objectives
and policies and in a manner consistent with the previous arrangement. PMF pays
for the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund will bear all other costs and expenses.
The Fund had an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF was computed daily and payable monthly, 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
furnished to the Fund such services as the Fund may require in connection with
the administration of the Fund's business affairs. PMF also provided certain
transfer agent services through its wholly-owned subsidiary, Prudential Mutual
Fund Services, Inc. ("PMFS"). For such services, PMFS was paid .03% of the
Company's average daily net assets up to $250 million and .02% of the Company's
average daily net assets in excess of $250 million from the administration fee
paid to PMF.
Effective October 31, 1996 Prudential Securities Incorporated ("PSI") became the
distributor of the Fund's Class A, Class B and Class C shares. PSI also will
incur the expenses of distributing the Fund's Class Z shares under the
distribution agreement, none of which is reimbursed by or paid for by the Fund.
Pursuant to plans of distribution (the "Class A, B and C plans"), the Fund
compensates PSI for distribution-related activities at an annual rate of up to
.30 of 1%, 1% and 1% of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Class A, Class B and Class C plans
will be .25%, 1% and 1%, respectively, of the average daily net assets of the
Fund.
PIFM, Jennison, PMF and PSI are indirect wholly-owned subsidiaries of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities, excluding short-term investments,
for the six months ended March 31, 1997 aggregated $28,911,422 and $36,690,586,
respectively.
The cost basis of investments for federal income tax purposes is $133,961,911.
As of March 31, 1997, net unrealized appreciation for federal income tax
purposes was $9,820,092 (gross unrealized appreciation--$11,469,015, gross
unrealized depreciation--$1,648,923).
- --------------------------------------------------------------------------------
B-74
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE PRUDENTIAL DRYDEN FUND
(UNAUDITED) ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
NOTE 4. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At March 31, 1997, the Fund had
a 2.55% undivided interest in the repurchase agreements in the joint account.
The undivided interest represented $24,526,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the collateral
therefore was as follows:
Bear, Stearns & Co., Inc., 6.40%, in the principal amount of $315,000,000,
repurchase price $315,056,000, due 4/1/97. The value of the collateral including
accrued interest was $321,684,450.
CS First Boston Corp., 6.45%, in the principal amount of $250,000,000,
repurchase price $250,044,792, due 4/1/97. The value of the collateral including
accrued interest was $256,162,625.
Goldman, Sachs & Co., Inc., 6.50%, in the principal amount of $315,000,000,
repurchase price $315,056,875, due 4/1/97. The value of the collateral including
accrued interest was $321,300,771.
J.P. Morgan Securities, Inc., 6.00%, in the principal amount of $18,220,000,
repurchase price $18,223,037, due 4/1/97. The value of the collateral including
accrued interest was $18,584,479.
UBS Securities, Inc., 6.40% in the principal amount of $65,000,000, repurchase
price $65,011,556, due 4/1/97. The value of the collateral including accrued
interest was $66,300,284.
- --------------------------------------------------------------------------------
NOTE 5. CAPITAL
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ---------- ------------
<S> <C> <C>
October 31, 1996(a)
through March 31, 1997:
Shares sold........................ 165 $ 2,242
Shares issued in reinvestment of
dividends and distributions...... 14 183
---------- ------------
Net increase in shares
outstanding...................... 179 $ 2,425
========== =============
<CAPTION>
Class B SHARES AMOUNT
- ------- ---------- ------------
<S> <C> <C>
October 31, 1996(a)
through March 31, 1997:
Shares sold........................ 4,115 $ 52,384
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. (75) (964)
---------- ------------
Net increase in shares
outstanding...................... 4,041 $ 51,429
========== ============
<CAPTION>
Class C
- -------
<S> <C> <C>
October 31, 1996(a)
through March 31, 1997:
Shares sold........................ 15 200
Shares issued in reinvestment of
dividends and distributions...... 1 9
---------- ------------
Net increase in shares
outstanding...................... 16 $ 209
========== ============
<CAPTION>
Class Z
- -------
<S> <C> <C>
Six months ended March 31, 1997:
Shares sold........................ 2,879,807 $ 36,571,213
Shares issued in reinvestment of
dividends and distributions...... 1,097,487 13,883,205
Shares reacquired.................. (4,113,338) (52,264,194)
---------- ------------
Net decrease in shares
outstanding...................... (136,044) $ (1,809,776)
========== ============
Year ended September 30, 1996:
Shares sold........................ 2,893,381 $ 36,454,403
Shares issued in reinvestment of
dividends and distributions...... 483,285 5,905,744
Shares reacquired.................. (2,273,501) (28,618,544)
---------- ------------
Net increase in shares
outstanding...................... 1,103,165 $ 13,741,603
========== ============
</TABLE>
- ---------------
(a) Commencement of offering of Class A, B, and C shares.
Of the shares outstanding at March 31, 1997, PIFM and affiliates owned 514,745
shares of the Fund.
- --------------------------------------------------------------------------------
B-75
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE PRUDENTIAL DRYDEN FUND
(UNAUDITED) ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
NOTE 6. REORGANIZATION
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the 'Plan of Reorganization') for five other series of the
Company. The Plan of Reorganization was approved by shareholders on September 6,
1996. This Fund approved a new manager, distributor and transfer agency
agreements on October 30, 1996.
Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund ('Series')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.
International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.
Stock Index Fund and the Fund remained with The Prudential Institutional Fund
(renamed the Prudential Dryden Fund) as separate funds. Existing shareholders of
the Fund became Class Z shareholders and the Fund began offering Classes A, B
and C shares. Stock Index Fund offers a single class of shares. Effective
October 30, 1996 these funds were managed by PMF, PMFS will provide transfer
agency services and PSI will act as distributor.
- --------------------------------------------------------------------------------
B-76
<PAGE>
THE PRUDENTIAL DRYDEN FUND
FINANCIAL HIGHLIGHTS (UNAUDITED) ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
----------- ----------- ----------- ------------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996(e) 1996(e) 1996(e) SIX MONTHS YEAR ENDED SEPTEMBER
THROUGH THROUGH THROUGH ENDED 30,
MARCH 31, MARCH 31, MARCH 31, MARCH 31, ---------------------
1997 1997 1997 1997 1996 1995
----------- ----------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 13.40 $ 13.40 $ 13.40 $ 13.01 $ 12.46 $ 10.92
----- ----- ----- ---------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............. .18 .14 .14 .20 .29(b) .33(b)
Net realized and unrealized gain
(loss) on investment
transactions................... .05 .06 .06 .43 .81 1.54
----- ----- ----- ---------- -------- --------
Total from investment
operations.................. .23 .20 .20 .63 1.10 1.87
----- ----- ----- ---------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment
income......................... (.39) (.39) (.39) (.39) (.37) (.29)
Distributions from net realized
gains.......................... (.78) (.78) (.78) (.78) (.18) (.04)
----- ----- ----- ---------- -------- --------
Total distributions............ (1.17) (1.17) (1.17) (1.17) (.55) (.33)
----- ----- ----- ---------- -------- --------
Net asset value, end of period.... $ 12.46 $ 12.43 $ 12.43 $ 12.47 $ 13.01 $ 12.46
===== ===== ===== ========== ======== ========
TOTAL RETURN(d)................... 1.50% 1.34% 1.34% 4.71% 9.11% 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $ 2 $ 50 $ 197(f) $145,529 $153,588 $133,352
Average net assets (000).......... $ 2 $ 7 $ 163(f) $156,582 $142,026 $104,821
Ratios to average net assets:(b)
Expenses, including
distribution fees........... 1.21%(c) 1.96%(c) 1.96%(c) .96%(c) 1.00% 1.00%
Expenses, excluding
distribution fees........... .96%(c) .96%(c) .96%(c) .96%(c) N/A N/A
Net investment income.......... 2.75%(c) 2.00%(c) 2.00%(c) 3.00%(c) 3.09% 3.53%
Portfolio turnover rate........... 23% 23% 23% 23% 51% 30%
Average commission rate paid per
share.......................... $ .0604 $ .0604 $ .0604 $ .0604 $ .0654 N/A
<CAPTION>
JANUARY 4,
1993(a)
THROUGH
SEPTEMBER 30,
1994 1993
------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 11.05 $ 10.00
------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............. .24(b) .21(b)
Net realized and unrealized gain
(loss) on investment
transactions................... (.12) .84
------- ------
Total from investment
operations.................. .12 1.05
------- ------
LESS DISTRIBUTIONS:
Dividends from net investment
income......................... (.14) --
Distributions from net realized
gains.......................... (.11) --
------- ------
Total distributions............ (.25) --
------- ------
Net asset value, end of period.... $ 10.92 $ 11.05
======= =======
TOTAL RETURN(d)................... 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $81,176 $38,786
Average net assets (000).......... $58,992 $12,815
Ratios to average net assets:(b)
Expenses, including
distribution fees........... 1.00% 1.00%(c)
Expenses, excluding
distribution fees........... N/A N/A
Net investment income.......... 3.06% 2.68%(c)
Portfolio turnover rate........... 40% 47%
Average commission rate paid per
share.......................... N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total return for periods of less than a full
year are not annualized. Total return includes the effect of expense
subsidies.
(e) Commencement of offering of Class A, B and C shares.
(f) Figure is actual and not rounded to nearest thousand.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-77
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--92.8%
COMMON STOCKS--92.8%
- ----------------------------------------------------------------
AEROSPACE/DEFENSE--2.2%
11,600 Allied-Signal, Inc. $ 826,500
15,015 Boeing Co. 1,480,854
2,700 General Dynamics Corp. 181,912
7,830 Lockheed Martin Corp. 657,720
8,600 McDonnell Douglas Corp. 524,600
2,300 Northrop Grumman Corp. 173,938
9,600 Raytheon Co. 433,200
9,000 Rockwell International Corp. 583,875
9,800 United Technologies Corp.(a) 737,450
------------
5,600,049
- ----------------------------------------------------------------
AIRLINES--0.3%
3,750 AMR Corp.(a) 309,375
3,000 Delta AirLines, Inc. 252,375
5,900 Southwest Airlines Co. 130,538
2,800 USAir Group, Inc.(a) 68,600
------------
760,888
- ----------------------------------------------------------------
ALUMINUM--0.4%
9,300 Alcan Aluminum Ltd. 315,038
7,200 Aluminum Co. of America 489,600
2,550 Reynolds Metals Co. 158,100
------------
962,738
- ----------------------------------------------------------------
AUTOMOBILES & TRUCKS--1.9%
29,600 Chrysler Corp. 888,000
1,600 Cummins Engine Co., Inc. 82,000
4,000 Dana Corp. 131,500
2,600 Echlin Inc. 88,400
48,400 Ford Motor Co. 1,518,550
31,000 General Motors Corp. 1,716,625
4,800 Genuine Parts Co. 223,800
- ----------------------------------------------------------------
1,700 Johnson Controls, Inc. $ 136,850
3,020 Navistar International Corp.(a) 28,312
2,500 Safety-Kleen Corp. 36,875
------------
4,850,912
- ----------------------------------------------------------------
BANKING--7.3%
17,430 Banc One Corp. 692,842
6,200 Bank of Boston Corp. 415,400
16,000 Bank of New York Co., Inc. 588,000
14,700 BankAmerica Corp. 1,481,025
3,300 Bankers Trust NY Corp. 270,600
8,000 Barnett Banks, Inc. 372,000
18,008 Chase Manhattan Corp. 1,685,999
19,200 Citicorp 2,078,400
4,500 Comerica, Inc. 253,688
9,100 CoreStates Financial Corp. 432,250
4,300 Fifth Third Bancorp 333,250
5,500 First Bank System, Inc. 401,500
13,101 First Chicago NBD Corp. 709,092
11,600 First Union Corp. 941,050
10,787 Fleet Financial Group, Inc. 617,556
2,400 Golden West Financial Corp. 150,600
5,600 Great Western Financial Corp. 226,100
4,200 H.F. Ahmanson & Co. 153,300
9,200 KeyCorp 448,500
5,325 Mellon Bank Corp. 387,394
7,600 Morgan (J.P.) & Co. Inc. 746,700
9,200 National City Corp. 428,950
28,976 NationsBank Corp. 1,604,546
15,200 Norwest Corp. 703,000
13,900 PNC Bank Corp. 556,000
2,200 Republic New York Corp. 193,875
9,100 Suntrust Banks, Inc. 422,012
6,200 U.S. Bancorp 331,700
3,776 Wells Fargo & Co. 1,072,856
------------
18,698,185
</TABLE>
- -----------------------------------------------------------------
See Notes to Financial Statements.
B-78
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
BEVERAGES--3.7%
1,600 Adolph Coors Co. $ 34,000
20,300 Anheuser Busch Cos., Inc. 855,138
2,900 Brown-Forman Corp. 138,475
102,000 Coca-Cola Co. 5,699,250
63,700 PepsiCo, Inc. 2,078,212
15,400 Seagram Co., Ltd. 589,050
------------
9,394,125
- ----------------------------------------------------------------
CHEMICALS--2.1%
4,600 Air Products & Chemicals, Inc. 312,225
10,000 Dow Chemical Co. 800,000
23,100 E.I. du Pont de Nemours & Co. 2,448,600
3,100 Eastman Chemical Co. 166,625
4,200 Hercules, Inc. 177,450
24,200 Monsanto Co. 925,650
2,800 Nalco Chemical Co. 104,650
2,600 Rohm & Haas Co. 194,675
4,000 Sigma-Aldrich Corp. 123,500
5,200 Union Carbide Corp. 230,100
------------
5,483,475
- ----------------------------------------------------------------
CHEMICALS-SPECIALTY--0.4%
5,925 Engelhard Corp. 124,425
2,500 Great Lakes Chemical Corp. 115,000
5,900 Morton International, Inc. 249,275
6,500 Praxair, Inc. 291,688
1,800 Raychem Corp. 148,275
3,400 W.R. Grace & Co. 161,075
------------
1,089,738
- ----------------------------------------------------------------
COMMERCIAL SERVICES--0.2%
16,325 CUC International Inc.(a) 367,313
3,400 Deluxe Corp. 110,075
1,300 John H. Harland Co. 30,875
4,200 Moore Corp., Ltd. 84,000
------------
592,263
- ----------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--4.5%
7,100 3Com Corp.(a) $ 232,525
1,800 Autodesk, Inc. 55,800
12,000 Automatic Data Processing, Inc. 502,500
8,000 Bay Networks, Inc.(a) 143,000
6,400 Cabletron Systems, Inc.(a) 187,200
3,000 Ceridian Corp.(a) 107,625
26,900 Cisco Systems, Inc.(a) 1,294,562
14,750 Computer Associates International,
Inc. 573,406
3,050 Computer Sciences Corp.(a) 188,338
7,300 Dell Computer Corp.(a) 493,663
9,500 EMC Corp.(a) 337,250
1,300 Intergraph Corp.(a) 10,075
8,700 Micron Technology Inc. 352,350
49,400 Microsoft Corp.(a) 4,529,362
3,493 NCR Corp. (New)(a) 123,128
14,400 Novell, Inc.(a) 136,800
27,675 Oracle Systems Corp.(a) 1,067,217
10,200 Seagate Technology, Inc. 457,725
7,300 Silicon Graphics, Inc.(a) 142,350
15,300 Sun Microsystems, Inc.(a) 441,788
4,500 Tandem Computers Inc.(a) 53,438
------------
11,430,102
- ----------------------------------------------------------------
CONSTRUCTION--0.1%
3,400 Fluor Corp. 178,500
1,800 Foster Wheeler Corp. 63,675
1,100 Kaufman & Broad Home Corp. 14,575
900 Pulte Corp. 26,325
------------
283,075
- ----------------------------------------------------------------
CONTAINERS--0.2%
1,200 Ball Corp. 31,800
2,300 Bemis Co., Inc. 92,000
5,200 Crown Cork & Seal Co., Inc. 268,450
------------
392,250
</TABLE>
- -----------------------------------------------------------------
See Notes to Financial Statements.
B-79
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
COSMETICS & SOAPS--2.4%
3,200 Alberto-Culver Co. $ 83,600
5,300 Avon Products, Inc. 278,250
2,100 Clorox Co. 235,462
6,000 Colgate-Palmolive Co. 597,750
22,700 Gillette Co. 1,648,587
4,450 International Flavors & Fragrances,
Inc. 194,688
27,900 Procter & Gamble Co. 3,208,500
------------
6,246,837
- ----------------------------------------------------------------
DIVERSIFIED GAS--0.2%
4,400 Coastal Corp. 211,200
1,000 Eastern Enterprises, Inc. 30,875
2,900 Enserch Corp. 59,450
2,000 NICOR Inc. 64,000
1,300 Oneok Inc. 33,800
------------
399,325
- ----------------------------------------------------------------
DRUGS & MEDICAL SUPPLIES--9.0%
31,900 Abbott Laboratories 1,790,387
2,600 Allergan, Inc. 75,725
3,700 ALZA Corp.(a) 101,750
26,200 American Home Products Corp. 1,572,000
11,000 Amgen, Inc. (a) 614,625
2,300 Bausch & Lomb, Inc. 90,850
11,100 Baxter International, Inc. 478,687
5,000 Becton, Dickinson & Co. 225,000
5,100 Biomet, Inc.(a) 86,063
7,300 Boston Scientific Corp.(a) 450,775
41,100 Bristol-Myers Squibb Co. 2,424,900
2,200 C.R. Bard, Inc. 62,700
2,050 Covance, Inc.(a) 33,056
22,600 Eli Lilly & Co. 1,858,850
3,000 Guidant Corp. 184,500
54,600 Johnson & Johnson Co. 2,886,975
3,100 Mallinckrodt, Inc. 127,488
9,800 Medtronic, Inc. 610,050
49,500 Merck & Co., Inc. 4,170,375
26,400 Pfizer Inc. 2,220,900
20,755 Pharmacia & Upjohn, Inc. 760,152
- ----------------------------------------------------------------
15,100 Schering-Plough Corp. $ 1,098,525
3,300 St. Jude Medical, Inc.(a) 110,138
2,500 United States Surgical Corp. 76,250
11,100 Warner-Lambert Co. 960,150
------------
23,070,871
- ----------------------------------------------------------------
ELECTRICAL EQUIPMENT--0.4%
7,300 Applied Materials, Inc.(a) 338,538
2,200 W.W. Grainger Inc. 162,800
25,900 Westinghouse Electric Corp. 459,725
------------
961,063
- ----------------------------------------------------------------
ELECTRONICS--4.6%
5,600 Advanced Micro Devices, Inc.(a) 232,400
5,000 Amdahl Corp.(a) 46,875
8,984 AMP, Inc. 308,825
4,900 Apple Computer, Inc. 89,425
1,700 Data General Corp.(a) 28,900
6,300 Digital Equipment Corp.(a) 172,463
2,100 EG&G, Inc. 43,838
18,200 Emerson Electric Co. 819,000
5,800 General Instrument Corp.(a) 132,675
1,600 Harris Corp. 123,000
41,600 Hewlett-Packard Co. 2,215,200
33,700 Intel Corp. 4,688,512
5,200 LSI logic Corp.(a) 180,700
24,300 Motorola, Inc. 1,467,112
5,900 National Semiconductors Corp.(a) 162,250
1,700 Perkin-Elmer Corp. 109,438
3,300 Pioneer Hi-Bred International, Inc. 207,487
2,400 Tandy Corp. 120,300
1,400 Tektronix, Inc. 70,700
7,800 Texas Instruments, Inc. 584,025
2,200 Thomas & Betts Corp. 94,050
------------
11,897,175
- ----------------------------------------------------------------
ENVIRONMENTAL SERVICES--0.1%
13,100 Laidlaw Inc. (Class "B" Stock) 180,125
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-80
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
FINANCIAL SERVICES--2.9%
19,400 American Express Co. $ 1,161,575
2,200 Beneficial Corp. 142,175
13,116 Dean Witter Discover & Co. 457,421
29,300 Federal Home Loan Mortgage Corp. 798,425
44,900 Federal National Mortgage Association 1,622,012
18,300 First Data Corp. 619,912
5,700 Green Tree Financial Corp. 192,375
4,200 H&R Block, Inc. 123,375
4,000 Household International, Inc. 344,500
1,800 MBIA, Inc. 172,575
13,738 MBNA Corp. 382,933
6,800 Merrill Lynch & Co., Inc. 583,950
6,200 Morgan Stanley Group, Inc. 364,250
4,400 Salomon, Inc. 219,450
2,650 Transamerica Corp. 237,175
------------
7,422,103
- ----------------------------------------------------------------
FOOD & BEVERAGE--2.4%
22,434 Archer-Daniels-Midland Co. 401,008
19,000 Campbell Soup Co. 881,125
9,900 ConAgra, Inc. 537,075
5,900 CPC International, Inc. 483,800
1,300 Fleming Cos., Inc. 22,750
6,550 General Mills, Inc. 406,919
2,500 Giant Foods, Inc. 80,000
15,100 H.J. Heinz & Co. 596,450
6,200 Hershey Foods Corp. 310,000
8,550 Kellogg Co. 574,987
5,700 Quaker Oats Co. 208,050
4,300 Ralston Purina Co. 335,937
19,900 Sara Lee Corp. 805,950
7,400 Sysco Corp. 252,525
4,800 W.M. Wrigley Jr. Co. 280,200
------------
6,176,776
- ----------------------------------------------------------------
FOREST PRODUCTS--1.3%
2,000 Boise Cascade Corp. 61,000
4,000 Champion International Corp. 182,000
3,750 Georgia-Pacific Corp. 271,875
- ----------------------------------------------------------------
12,216 International Paper Co. $ 474,897
3,500 James River Corp. 101,937
11,608 Kimberly-Clark Corp. 1,153,545
4,500 Louisiana-Pacific Corp. 93,375
2,100 Mead Corp. 111,300
1,100 Potlatch Corp. 45,238
4,000 Stone Container Corp. 44,500
2,300 Temple Inland Inc. 120,750
2,800 Union Camp Corp. 131,950
4,100 Westvaco Corp. 103,012
8,200 Weyerhaeuser Co. 365,925
2,300 Willamette Industries, Inc. 143,750
------------
3,405,054
- ----------------------------------------------------------------
GAS PIPELINES--0.6%
6,318 Cinergy Corp. 215,602
2,300 Columbia Gas System, Inc. 133,112
3,900 Consolidated Natural Gas Co. 196,462
539 El Paso Natural Gas Co. 30,521
10,600 Enron Corp. 402,800
5,300 NorAm Energy Corp. 77,513
6,200 PanEnergy Corp. 267,375
1,300 Peoples Energy Corp. 43,063
6,400 Williams Companies, Inc. 284,800
------------
1,651,248
- ----------------------------------------------------------------
HEALTH SERVICES--0.1%
12,800 Healthsouth Corp.(a) 244,800
- ----------------------------------------------------------------
HOSPITAL MANAGEMENT--0.9%
4,000 Beverly Enterprises, Inc.(a) 57,000
27,628 Columbia/HCA Healthcare Corp. 928,991
6,600 Humana, Inc.(a) 145,200
2,800 Manor Care, Inc. 68,250
9,600 Service Corp. International 285,600
900 Shared Medical Systems Corp. 41,850
12,200 Tenet Healthcare Corp.(a) 300,425
7,500 United Healthcare Corp. 357,188
------------
2,184,504
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-81
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
HOUSING RELATED--0.5%
1,700 Armstrong World Industries, Inc. $ 110,075
1,400 Centex Corp. 49,350
1,600 Fleetwood Enterprises, Inc. 40,000
7,100 Lowe's Companies, Inc. 265,362
6,700 Masco Corp. 239,525
4,000 Maytag Corp. 82,500
2,200 Owens Corning 88,550
3,600 Stanley Works 136,350
2,700 Tupperware Corp. 90,450
3,100 Whirlpool Corp. 147,638
------------
1,249,800
- ----------------------------------------------------------------
INSURANCE--4.0%
6,200 Aetna, Inc. 532,425
18,174 Allstate Corp. 1,079,081
8,300 American General Corp. 338,225
19,312 American International Group, Inc. 2,266,746
4,500 Aon Corp. 275,625
7,200 Chubb Corp. 387,900
3,050 CIGNA Corp. 445,681
6,800 Conseco, Inc. 242,250
3,400 General Re Corp. 537,200
4,800 ITT Hartford Group Inc. 346,200
2,825 Jefferson-Pilot Corp. 153,609
4,300 Lincoln National Corp. 230,050
2,900 Marsh & McLennan Companies, Inc. 328,425
2,400 MGIC Investment Corp. 169,800
3,900 Providian Corp. 208,650
5,200 SAFECO Corp. 208,000
3,400 St. Paul Cos, Inc. 220,575
2,950 Torchmark Corp. 163,356
26,162 Travelers Group, Inc. 1,252,506
3,000 UNUM Corp. 219,000
4,900 USF&G Corp. 105,350
1,350 USLIFE Corp. 63,113
6,800 Wachovia Corp. 370,600
------------
10,144,367
- ----------------------------------------------------------------
LEISURE--1.2%
4,200 Brunswick Corp. $ 112,875
4,100 Harrah's Entertainment Inc.(a) 70,213
5,400 Hasbro, Inc. 147,825
4,700 ITT Corp. (New) 276,712
1,600 King World Productions, Inc.(a) 58,400
11,087 Mattel, Inc. 266,088
27,692 Walt Disney, Co. 2,021,516
------------
2,953,629
- ------------------------------------------------------------
LODGING--0.3%
5,300 HFS, Inc.(a) 312,038
10,300 Hilton Hotels Corp. 249,775
5,200 Marriott International, Inc. 258,700
------------
820,513
- ----------------------------------------------------------------
MACHINERY--1.1%
1,100 Briggs & Stratton Corp. 49,363
3,000 Case Corp. 152,250
7,800 Caterpillar Inc. 625,950
1,400 Cincinnati Milacron, Inc. 26,250
4,400 Cooper Industries, Inc. 190,850
10,500 Deere & Co. 456,750
4,700 Dover Corp. 246,750
3,100 Eaton Corp. 219,712
1,000 Giddings & Lewis, Inc. 14,875
2,000 Harnischfeger Industries, Inc. 93,000
4,400 Ingersoll-Rand Co. 191,950
1,602 PACCAR Inc. 106,934
2,950 Parker-Hannifin Corp. 126,112
2,650 Snap-On Inc. 102,688
6,200 Thermo Electron Corp.(a) 191,425
1,200 Timken Co. 64,200
------------
2,859,059
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-82
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- -----------------------------------------------------------------
MEDIA--1.7%
13,550 Comcast Corp. $ 228,656
3,900 Dow Jones & Co., Inc. 158,438
6,900 Dun & Bradstreet Corp. 175,088
5,750 Gannett Co., Inc. 493,781
3,300 Interpublic Group of Companies, Inc. 174,075
3,700 Knight-Ridder, Inc. 147,538
4,100 McGraw-Hill Companies, Inc. 209,612
2,200 Meredith Corp. 50,875
3,900 New York Times Co. 172,088
6,100 R.R. Donnelley & Sons, Co. 212,737
23,300 Time Warner, Inc. 1,007,725
4,100 Times Mirror Co. 223,962
5,100 Tribune Co. 206,550
25,600 U.S. West Media Group 476,800
14,339 Viacom, Inc.(a) 474,979
-------------
4,412,904
- -----------------------------------------------------------------
MINERAL RESOURCES--0.7%
2,000 ASARCO Inc. 56,250
14,600 Barrick Gold Corp. 346,750
3,850 Cyprus Amax Minerals Co. 91,438
5,200 Echo Bay Mines, Ltd. 34,450
7,900 Freeport-McMoran Copper & Gold, Inc 239,962
6,100 Homestake Mining Co. 92,263
7,000 Inco, Ltd. 228,375
4,098 Newmont Mining Corp. 158,798
2,600 Phelps Dodge Corp. 190,125
10,300 Placer Dome, Inc. 186,687
5,440 Santa Fe Pacific Gold Corp. 89,760
-------------
1,714,858
- -----------------------------------------------------------------
MISCELLANEOUS BASIC INDUSTRY--4.2%
8,900 Browning-Ferris Industries, Inc. 256,987
6,800 Cognizant Corp. 198,050
1,800 Crane Co. 56,475
2,700 Ecolab, Inc. 102,600
1,450 FMC Corp.(a) 88,813
67,500 General Electric Co. 6,699,375
2,000 General Signal Corp. 78,250
5,100 Illinois Tool Works, Inc. 416,287
4,700 ITT Industries, Inc. 105,163
4,700 Loews Corp. 417,712
- -----------------------------------------------------------------
1,800 Millipore Corp. $ 76,275
250 NACCO Industries, Inc. 12,313
5,333 Pall Corp. 123,326
7,500 PPG Industries, Inc. 405,000
1,025 Quest Diagnostics Inc.(a) 15,247
3,400 Textron, Inc. 357,000
1,100 Trinova Corp. 36,850
5,200 TRW, Inc. 269,100
6,900 Tyco International, Ltd 379,500
2,250 Unisource Worldwide, Inc. 34,594
19,700 WMX Technologies, Inc. 603,312
-------------
10,732,229
- -----------------------------------------------------------------
MISCELLANEOUS CONSUMER GROWTH--1.8%
3,200 American Greetings Corp. 102,200
3,900 Black & Decker Corp. 125,287
9,400 Corning, Inc. 417,125
13,700 Eastman Kodak Co. 1,039,487
1,500 Jostens, Inc. 33,938
17,100 Minnesota Mining & Manufacturing Co. 1,444,950
1,800 Polaroid Corp. 71,550
6,200 Rubbermaid, Inc. 154,225
6,600 Unilever N.V. 1,229,250
4,400 Whitman Corp. 107,800
-------------
4,725,812
- -----------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES--2.2%
4,300 Avery Dennison Corp. 165,550
11,100 Compaq Computer Corp.(a) 850,538
5,200 Honeywell, Inc. 352,950
5,400 Ikon Office Solutions Inc. 180,900
21,200 International Business Machines
Corp. 2,912,350
6,000 Pitney Bowes, Inc. 352,500
6,600 Unisys Corp.(a) 42,075
13,350 Xerox Corp. 759,281
-------------
5,616,144
</TABLE>
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-83
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
PETROLEUM--7.9%
3,700 Amerada Hess Corp. $ 196,100
20,400 Amoco Corp. 1,767,150
2,700 Ashland, Inc. 108,675
6,650 Atlantic Richfield Co. 897,750
5,100 Burlington Resources, Inc. 218,025
26,700 Chevron Corp. 1,858,987
50,950 Exxon Corp. 5,489,862
2,000 Kerr-McGee Corp. 123,750
1,400 Louisiana Land & Exploration Co. 66,325
16,200 Mobil Corp. 2,116,125
13,400 Occidental Petroleum Corp. 329,975
1,900 Pennzoil Co. 98,325
10,800 Phillips Petroleum Co. 441,450
22,000 Royal Dutch Petroleum Co. (ADR)
(Netherlands) 3,850,000
3,600 Santa Fe Energy Resources, Inc.(a) 49,950
2,800 Sun Co., Inc. 73,150
7,000 Tenneco Inc. 273,000
10,800 Texaco Inc. 1,182,600
10,260 Union Pacific Resources Group, Inc. 274,455
10,100 Unocal Corp. 385,063
11,800 USX - Marathon Group 328,925
------------
20,129,642
- ----------------------------------------------------------------
PETROLEUM SERVICES--1.1%
6,000 Baker Hughes, Inc. 230,250
7,300 Dresser Industries, Inc. 220,825
5,000 Halliburton Co. 338,750
1,100 Helmerich & Payne, Inc. 50,875
2,200 McDermott International, Inc. 47,025
4,400 Oryx Energy Co.(a) 84,700
16,800 PG&E Corp. 394,800
3,700 Rowan Companies, Inc.(a) 83,713
10,100 Schlumberger, Ltd. 1,083,225
3,500 Sonat, Inc. 190,750
2,100 Western Atlas, Inc.(a) 127,312
------------
2,852,225
- ----------------------------------------------------------------
PRECIOUS METALS
8,900 Battle Mountain Gold Co. $ 58,963
- ----------------------------------------------------------------
RAILROADS--0.8%
6,265 Burlington Northern, Inc. 463,610
2,667 Conrail, Inc. 300,704
8,900 CSX Corp. 413,850
5,100 Norfolk Southern Corp. 434,775
10,000 Union Pacific Corp. 567,500
------------
2,180,439
- ----------------------------------------------------------------
RESTAURANTS--0.6%
5,950 Darden Restaurants, Inc. 46,856
28,600 McDonald's Corp. 1,351,350
5,400 Wendys International, Inc. 111,375
------------
1,509,581
- ----------------------------------------------------------------
RETAIL--4.7%
10,400 Albertson's, Inc. 353,600
5,900 American Stores Co. 262,550
6,100 AutoZone, Inc.(a) 137,250
3,400 Charming Shoppes, Inc. 18,275
4,000 Circuit City Stores, Inc. 133,500
8,552 Costco Companies, Inc.(a) 236,249
4,300 CVS Corp. 198,337
8,800 Dayton-Hudson Corp. 367,400
4,700 Dillard Department Stores, Inc. 148,050
8,400 Federated Department Stores, Inc.(a) 276,150
1,400 Great Atlantic & Pacific Tea Co., Inc. 35,525
2,800 Harcourt General, Inc. 130,200
19,566 Home Depot, Inc. 1,046,781
10,300 J.C. Penney Co., Inc. 490,537
20,000 Kmart Corp. 242,500
5,200 Kroger Co.(a) 263,900
2,800 Liz Claiborne, Inc. 122,150
1,400 Longs Drug Stores Corp. 32,900
10,200 May Department Stores Co. 464,100
1,400 Mercantile Stores Co., Inc. 64,925
6,500 Newell Co. 217,750
11,800 Nike, Inc. (Class B) 731,600
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-84
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
RETAIL (CONT'D.)
3,300 Nordstrom, Inc. $ 124,988
2,400 Pep Boys - Manny, Moe & Jack 72,000
2,400 Reebok International, Ltd. 107,700
5,000 Rite Aid Corp. 210,000
16,100 Sears Roebuck & Co. 809,025
7,000 Sherwin-Williams Co. 189,000
2,000 Stride Rite Corp. 30,000
2,700 SUPERVALU, Inc. 80,325
11,700 The Gap, Inc. 391,950
11,288 The Limited, Inc. 207,417
3,200 TJX Companies, Inc. 136,800
12,000 Toys 'R' Us, Inc.(a) 336,000
94,100 Wal-Mart Stores, Inc. 2,623,037
10,000 Walgreen Co. 418,750
6,100 Winn-Dixie Stores, Inc. 201,300
5,700 Woolworth Corp. 133,238
------------
12,045,759
- ----------------------------------------------------------------
RUBBER--0.2%
2,200 B.F. Goodrich Co. 80,575
3,800 Cooper Tire & Rubber Co. 70,300
6,300 Goodyear Tire & Rubber Co. 329,175
------------
480,050
- ----------------------------------------------------------------
STEEL--0.2%
7,272 Allegheny Teldyne, Inc. 204,525
3,800 Armco, Inc.(a) 15,200
4,500 Bethlehem Steel Corp.(a) 37,125
2,400 Inland Steel Industries, Inc. 46,800
3,700 Nucor Corp. 169,275
3,500 USX-U.S. Steel Group, Inc. 93,187
3,750 Worthington Industries, Inc. 71,719
------------
637,831
- ----------------------------------------------------------------
TELECOMMUNICATIONS--3.4%
20,600 AirTouch Communications, Inc.(a) 473,800
7,700 Alltel Corp. 250,250
3,788 Andrew Corp.(a) 136,823
- ----------------------------------------------------------------
66,400 AT&T Corp. $ 2,307,400
4,900 DSC Communications Corp.(a) 102,594
6,800 Frontier Corp. 121,550
26,070 Lucent Technologies, Inc. 1,375,192
28,200 MCI Communications Corp. 1,004,625
10,600 Northern Telecom, Ltd. 692,975
3,000 Scientific-Atlanta, Inc. 45,750
17,700 Sprint Corp. 805,350
27,600 Tele-Communications, Inc.(a) 331,200
7,300 Tellabs, Inc.(a) 263,713
35,300 WorldCom Inc.(a) 776,600
------------
8,687,822
- ----------------------------------------------------------------
TEXTILES--0.2%
3,000 Fruit of the Loom, Inc.(a) 124,500
2,000 National Service Industries, Inc. 78,250
1,500 Russell Corp. 53,625
900 Springs Industries, Inc. 40,275
2,600 V.F. Corp. 173,875
------------
470,525
- ----------------------------------------------------------------
TOBACCO--1.7%
7,000 American Brands, Inc. 354,375
33,450 Philip Morris Cos., Inc. 3,817,481
7,400 UST, Inc. 206,275
------------
4,378,131
- ----------------------------------------------------------------
TRUCKING & SHIPPING--0.1%
1,700 Caliber System, Inc. 45,050
4,600 Federal Express Corp.(a) 239,775
3,300 Ryder System, Inc. 96,525
------------
381,350
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-85
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE PRUDENTIAL DRYDEN FUND
MARCH 31, 1997 (UNAUDITED) STOCK INDEX FUND
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
UTILITY-COMMUNICATIONS--3.8%
22,500 Ameritech Corp. 1,383,750
17,900 Bell Atlantic Corp. 1,089,663
40,700 BellSouth Corp. 1,719,575
39,400 GTE Corp. $ 1,837,025
18,000 NYNEX Corp. 821,250
17,700 Pacific Telesis Group 668,175
24,700 SBC Communications Inc. 1,299,837
19,700 U.S. West Communications, Inc. 669,800
8,900 Unicom Corp. 173,550
------------
9,662,625
- ----------------------------------------------------------------
UTILITIES-ELECTRIC--2.2%
7,600 American Electric Power Co. 313,500
6,000 Baltimore Gas & Electric Co. 160,500
6,100 Carolina Power & Light Co. 221,125
8,800 Central & South West Corp. 188,100
9,500 Consolidated Edison Co. of NY, Inc. 285,000
7,300 Dominion Resources, Inc. 265,537
6,000 DTE Energy Co. 161,250
8,200 Duke Power Co. 361,825
17,700 Edison International 398,250
9,300 Entergy Corp. 227,850
7,500 FPL Group, Inc. 330,937
5,000 GPU Corp. 160,625
9,700 Houston Industries, Inc. 202,488
5,900 Niagara Mohawk Power Corp. 50,150
2,900 Northern States Power Co. 137,388
6,200 Ohio Edison Co. 130,975
3,600 Pacific Enterprises 108,900
12,200 PacifiCorp 260,775
9,400 PECO Energy Co. 191,525
6,400 PP & L Resources Inc. 129,600
9,800 Public Service Enterprise Group, Inc. 257,250
27,800 Southern Co. 587,275
9,300 Texas Utilities Co. 318,525
4,200 Union Electric Co. 154,875
------------
5,604,225
------------
Total common stocks
(cost $185,396,275) 237,686,164
- ----------------------------------------------------------------
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--8.0%
- ----------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--0.4%
$100(b) 4.98%, 6/19/97 $ 98,907
200(b) 5.05%, 6/19/97 197,784
700(b) 5.19%, 6/19/97 692,027
------------
Total U.S. Government Securities
(cost $988,718) 988,718
- ----------------------------------------------------------------
REPURCHASE AGREEMENT--7.6%
19,591 Joint Repurchase Agreement Account
6.438%, 04/01/97(Note 4)
(cost $19,591,000) 19,591,000
------------
Total short-term investments
(cost $20,579,718) 20,579,718
- ----------------------------------------------------------------
TOTAL INVESTMENTS--100.8%
(cost $205,975,993; Note 3) 258,265,882
Liabilities in excess of other
assets--(0.8%) (2,059,126)
------------
Net Assets--100% $256,206,756
============
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-86
<PAGE>
THE PRUDENTIAL DRYDEN FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS March 31, 1997
--------------
<S> <C>
Investments, at value (cost $205,975,993).................................................................. $258,265,882
Cash....................................................................................................... 297
Receivable for Fund shares sold............................................................................ 646,562
Dividends and interest receivable.......................................................................... 370,160
Prepaid deferred expenses.................................................................................. 11,258
-------------
Total assets............................................................................................ 259,294,159
-------------
LIABILITIES
Payable for Fund shares reacquired......................................................................... 1,459,155
Payable for investments purchased.......................................................................... 1,080,548
Due to broker - variation margin........................................................................... 398,200
Accrued expenses........................................................................................... 81,696
Management fee payable..................................................................................... 67,804
-------------
Total liabilities....................................................................................... 3,087,403
-------------
NET ASSETS................................................................................................. $256,206,756
=============
Net assets were comprised of:
Common stock, at par.................................................................................... $ 14,762
Paid-in capital in excess of par........................................................................ 202,574,602
-------------
202,589,364
Undistributed net investment income..................................................................... 946,211
Accumulated net realized gain on investments............................................................ 1,282,667
Net unrealized appreciation on investments.............................................................. 51,388,514
-------------
Net assets, March 31, 1997................................................................................. $256,206,756
=============
Shares of beneficial interest issued and outstanding....................................................... 14,762,241
=============
Net asset value per share.................................................................................. 17.36
=============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-87
<PAGE>
THE PRUDENTIAL DRYDEN FUND
STOCK INDEX FUND
STATEMENT OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31,
1997
NET INVESTMENT INCOME ----------
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $3,260)............................... $ 2,015,637
Interest.................................... 501,550
-----------
Total income............................. 2,517,187
-----------
Expenses
Management fee.............................. 352,217
Administration fee.......................... 26,557
Transfer agent's fees and expenses.......... 87,925
Custodian's fees and expenses............... 65,000
Reports to shareholders..................... 22,000
Legal fees and expenses..................... 11,500
Audit fees and expenses..................... 9,500
Registration fees........................... 8,000
Amortization of organization expenses....... 6,674
Trustees' fees.............................. 5,000
Miscellaneous............................... 6,318
-----------
Total expenses........................... 600,691
Less: Expense subsidy (Note 2)................. (16,070)
-----------
Net expenses............................. 584,621
-----------
Net investment income.......................... 1,932,566
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on:
Investment transactions..................... 144,070
Financial futures contracts................. 1,581,326
-----------
1,725,396
-----------
Net change in unrealized appreciation
(depreciation) on:
Investments................................. 16,291,366
Financial futures contracts................. (917,600)
-----------
15,373,766
-----------
Net gain on investments........................ 17,099,162
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS...................... $19,031,728
===========
</TABLE>
THE PRUDENTIAL DRYDEN FUND
STOCK INDEX FUND
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- -------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
INCREASE 1997 1996
IN NET ASSETS ---------- -------------
<S> <C> <C>
Operations
Net investment income......... $ 1,932,566 $ 2,743,808
Net realized gain on
investment transactions.... 1,725,396 1,791,564
Net change in unrealized
appreciation on
investments................ 15,373,766 20,293,266
-------------- -------------
Net increase in net assets
resulting from
operations................. 19,031,728 24,828,638
-------------- -------------
Dividends and distributions
Dividends to shareholders from
net investment income...... (3,111,526) (2,181,628)
-------------- -------------
Distributions to shareholders
from net realized gains.... (1,795,111) (4,441,170)
-------------- -------------
Fund share transactions
Net proceeds from shares
sold....................... 161,162,771 113,692,034
Net asset value of shares
issued to shareholders in
reinvestment of
distributions.............. 4,906,633 6,622,798
Cost of shares reacquired..... (108,366,255) (56,086,722)
-------------- -------------
Net increase in net assets
from Fund share
transactions............... 57,703,149 64,228,110
-------------- -------------
Total increase................... 71,828,240 82,433,950
NET ASSETS
Beginning of period.............. 184,378,516 101,944,566
-------------- -------------
End of period.................... $ 256,206,756 $ 184,378,516
============== =============
</TABLE>
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-88
<PAGE>
THE PRUDENTIAL DRYDEN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) STOCK INDEX FUND
- -------------------------------------------------------------------------------
The Prudential Dryden 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
currently consists of two separate funds: Stock Index Fund (the "Fund") and
Active Balanced Fund. Prior to October 28, 1996 the Company was named the
Prudential Institutional Fund and prior to September 20, 1996 it consisted of
seven separate funds, five of which were subsequently reorganized and combined
with existing funds in the Prudential Mutual Funds family of funds (see Note 6).
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. ("PIFM"). Investment operations of the Fund
commenced on November 5, 1992. The Fund's investment objective seeks to provide
investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index.
- -------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant
accounting policies followed by the Fund.
Securities Valuation: 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 closing bid and asked prices quoted 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 judgement of one of the subadvisers, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation margin,"
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Fund may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the
- --------------------------------------------------------------------------------
B-89
<PAGE>
THE PRUDENTIAL DRYDEN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) STOCK INDEX FUND
- -------------------------------------------------------------------------------
Fund. The Fund will declare and distribute its net investment income and net
capital gains, if any, at least annually. Dividends and distributions are
recorded on the ex-dividend date.
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 Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- -------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund had a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM had responsibility for all investment advisory services
and supervises the subadviser's performance of such services.
PIFM had a subadvisory agreement with The Prudential Investment Corporation
("PIC") through October 30, 1996. PIC furnished investment advisory services in
connection with the management of the Fund. PIFM paid for the costs and expenses
attributable to the subadvisory agreement and the salaries and expenses of all
personnel of the Fund except for fees and expenses of unaffiliated Trustees. The
Fund paid for all other costs and expenses.
Through October 30, 1996 the management fee paid PIFM was computed daily and
payable monthly at an annual rate of .40 of 1% of the average daily net assets
of the Fund. Effective October 31, 1996 the management fee paid PMF was computed
daily and payable monthly at an annual rate of .30 of 1% of the average daily
net assets of the Fund.
Effective October 31, 1996 the Fund entered a management agreement with
Prudential Mutual Fund Management LLC ('PMF'). Pursuant to this agreement PMF
has responsibility for all investment advisory services.
PMF entered into a subadvisory agreement with PIC. PIC, subject to the
supervision of PMF, manages the assets of the Fund in accordance with its
investment objectives and policies and in a manner consistent with the previous
agreement. PMF pays for the costs and expenses attributable to the subadvisory
agreement and the salaries and expenses of all personnel of the Fund except for
fees and expenses of unaffiliated Trustees.
PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses were recovered by PIFM through
October 30, 1996 so long as the total expense ratio did not exceed the
predetermined level set forth in the Fund's prospectus of .60% per annum. For
the six months ended March 31, 1997, PIFM subsidized $16,070 of the expenses of
the Fund (.007% of the average net assets of the Fund/$.001 per share).
The Fund had an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF was computed daily and payable monthly, 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
furnished to the Fund such services as the Fund may require in connection with
the administration of the Fund's business affairs. PMF also provided certain
transfer agent services through its wholly-owned subsidiary, Prudential Mutual
Fund Services, Inc. ("PMFS"). For such services, PMFS was paid .03% of the
Company's daily net assets up to $250 million and .02% of the Company's average
daily net assets in excess of $250 million from the administration fee paid to
PMF. Upon termination of the administration agreement, PMFS will enter into a
separate transfer agency agreement directly with the Fund.
Effective October 31, 1996 Prudential Securities Incorporated ("PSI") became the
distributor of the Fund's shares. Under the distribution agreement, PSI will
incur the expenses of distributing the Fund's shares, none of which is
reimbursed by or paid for by the Fund.
PIFM, PIC, PMF and PSI are indirect wholly-owned subsidiaries of the Prudential
Insurance Company of America.
- -------------------------------------------------------------------------------
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities, excluding short-term investments,
for the six months ended March 31, 1997 aggregated $48,658,157 and $626,905,
respectively.
- --------------------------------------------------------------------------------
B-90
<PAGE>
THE PRUDENTIAL DRYDEN FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) STOCK INDEX FUND
- -------------------------------------------------------------------------------
On March 31, 1997, the Stock Index Fund purchased 23 financial futures contracts
on the S&P 500 Index expiring June, 1997. The cost of such contracts was
$18,335,375. The value of such contracts on March 31, 1997 was $17,434,000,
thereby resulting in an unrealized loss of $901,375.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of March 31,
1997, net unrealized appreciation for federal income tax purposes was
$52,289,889 (gross unrealized appreciation--$55,255,235 gross unrealized
depreciation--$2,965,346).
- -------------------------------------------------------------------------------
NOTE 4. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At March 31, 1997, the Fund had
a 2.03% undivided interest in the repurchase agreements in the joint account.
The undivided interest represented $19,591,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the collateral therefor
was as follows:
Bear, Stearns & Co., Inc., 6.40%, in the principal amount of $315,000,000,
repurchase price $315,056,000, due 4/1/97. The value of the collateral including
accrued interest was $321,684,450.
CS First Boston Corp., 6.45%, in the principal amount of $250,000,000,
repurchase price $250,044,792, due 4/1/97. The value of the collateral including
accrued interest was $256,162,625.
Goldman, Sachs & Co., Inc., 6.50%, in the principal amount of $315,000,000,
repurchase price $315,056,875, due 4/1/97. The value of the collateral including
accrued interest was $321,300,771.
J.P. Morgan Securities, Inc., 6.00%, in the principal amount of $18,220,000,
repurchase price $18,223,037, due 4/1/97. The value of the collateral including
accrued interest was $18,584,479.
UBS Securities, Inc., 6.40% in the principal amount of $65,000,000, repurchase
price $65,011,556, due 4/1/97. The value of the collateral including accrued
interest was $66,300,284.
- -------------------------------------------------------------------------------
NOTE 5. CAPITAL
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the six months ended March 31, 1997 and the fiscal year ended September 30, 1996
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
---------- -------------
<S> <C> <C>
Shares sold............................... 9,188,807 7,589,233
Shares issued in reinvestment of dividends
and distributions........................ 283,293 467,712
Shares reacquired......................... (6,190,037) (3,745,568)
---------- -------------
Net increase.............................. 3,282,063 4,311,377
========== =============
</TABLE>
Of the shares outstanding at March 31, 1997, PIFM and affiliates owned 4,340,936
shares of the Fund.
- -------------------------------------------------------------------------------
NOTE 6. REORGANIZATION
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the 'Plan of Reorganization') for five other series of the
Company. The Plan of Reorganization was approved by shareholders on September 6,
1996. This Fund approved a new manager, distributor and transfer agency
agreements on October 30, 1996.
Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund ('Series')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.
International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.
Active Balanced Fund and the Fund remained with The Prudential Institutional
Fund (renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Active Balanced Fund became Class Z shareholders and Active
Balanced Fund began offering Classes A, B and C shares. The Fund offers a single
class of shares. Effective October 30, 1996 these funds were managed by PMF,
PMFS will provide transfer agency services and PSI will act as distributor.
- --------------------------------------------------------------------------------
B-91
<PAGE>
THE PRUDENTIAL DRYDEN FUND
FINANCIAL HIGHLIGHTS (UNAUDITED) STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVEMBER 5,
SIX MONTHS 1992(a)
ENDED YEAR ENDED SEPTEMBER 30, THROUGH
MARCH 31, --------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
---------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 16.06 $ 14.22 $ 11.27 $ 11.12 $ 10.00
--------- -------- -------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (b)............................. .14 .25 .23 .26 .23
Net realized and unrealized gain on investment
transactions....................................... 1.57 2.44 2.97 .11 .94
--------- ------- ------- ------ ----------
Total from investment operations.................... 1.71 2.69 3.20 .37 1.17
--------- ------- ------- ------ ----------
LESS DISTRIBUTIONS:
Dividends from net investment income.................. (.26) (.28) (.22) (.18) (.05)
Distributions from net realized gains................. (.15) (.57) (.03) (.04) --
--------- -------- -------- ------- -----------
Total distributions................................. (.41) (.85) (.25) (.22) (.05)
--------- -------- -------- ------- -----------
Net asset value, end of period........................ $ 17.36 $ 16.06 $ 14.22 $ 11.27 $ 11.12
========= ======== ======== ======= ===========
TOTAL RETURN(d)....................................... 10.65% 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $256,207 $184,379 $101,945 $50,119 $ 27,142
Average net assets (000).............................. $224,665 $142,540 $ 71,711 $38,098 $ 18,807
Ratios to average net assets: (b)
Expenses............................................ .52%(c) .60% .60% .60% .60%(c)
Net investment income............................... 1.73%(c) 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate............................... 1% 2% 11% 2% 1%
Average commission rate paid per share................ $ 0.0250 $ 0.0250 N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-92
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
S&P RATINGS, MOODY'S AND DUFF & PHELPS RATINGS
S&P RATINGS CORPORATE BOND RATINGS:
AAA-Bonds rated AAA have the highest rating assigned by S&P Ratings 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.
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 a greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A-Bonds 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 rate 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.
A-1
<PAGE>
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 market 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.
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.
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.
A-2
<PAGE>
S&P COMMERCIAL PAPER RATINGS:
Commercial paper rate A-1 by S&P Ratings 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.
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.
DUFF & PHELPS COMMERCIAL PAPER RATINGS:
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: 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 factor 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.
A-3
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on
data obtained from statistical services, reports and other services believed by
the Manager to be reliable. The information has not been independently verified
by the Manager.
This chart shows the long-term performance of various asset classes and
the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
[CHART
<TABLE>
<S> <C>
Value of $1.00 Invested on
1/1/26 through 12/31/96
Small Stocks $4,495.99
Common Stock $1,370.95
Long-Term Bonds $ 33.73
Treasury Bills $ 13.54
Inflation $ 8.87
</TABLE>
Source: Stock, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates
Chicago, Illinois (annualy updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
I-1
<PAGE>
Set forth below is historical performance data relating to various
sectors of the fixed-income securities markets. The chart shows the historical
total returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis from
1987 through 1996. The total returns of the indices include accrued interest,
plus the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Funds or of any sector in which the
Funds invest.
All information relies on data obtained from statistical services,
reports and other services believed by the Manager to be reliable. Such
information has not been verified. The figures do not reflect the operating
expenses and fees of a mutual fund. See "Fund Expenses" in each Fund's
Prospectus. The net effect of the deduction of the operating expenses of a
mutual fund on these historical total returns, including the compounded effect
over time, could be substantial.
[Chart]
<TABLE>
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
U.S. HIGH YIELD
CORPORATE BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.7% 11.4%
WORLD GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% (6.0)% 19.6% 4.1%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7
</TABLE>
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
5 SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
[Chart]
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (1986-1995) IN U.S.
DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
Source: Morgan Stanley Capital International (MSCI) Used with permission. Morgan
Stanley Country indices are unmanaged indices which include those stocks making
up the largest two-thirds of each country's total stock market capitalization.
Returns reflect the reinvestment of all distributions. This chart is for
illustrative purposes only and is not indicative of the past, present or future
performance of any specific investment. Investors cannot invest directly in
stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
[Chart]
1969-1996
Capital Appreciation and Reinvesting Dividends--$228,416
Capital Appreciation Only--$80,463
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
[Chart]
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $9.2 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
U.S. 40.8%
Pacific Basin 20.7%
Europe 28.3%
Canada 2.2%
Source: Morgan Stanley Capital International, December 1995. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
I-3
<PAGE>
This chart below shows the historical volatility of general interest
rates as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
[CHART]
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1995. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the
Funds, may provide useful information about the effects of a hypothetical
investment diversified over different asset portfolios. The chart shows the
range of annual total returns for major stock and bond indices for the period
from December 31, 1975 through December 31, 1995. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-third
U.S. stocks (S&P 500), one-third foreign stocks (EAFE Index), and one-third U.S.
bonds (Lehman Index) would have eliminated the "highest highs" and "lowest lows"
of any single asset class.
[CHART]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK &
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
S&P 500 EAFE Lehman Aggregate
37.6% 69.9% 32.6%
-7.2% -23.2% -2.9%
Best Returns Zone
with a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
- ----------
*Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
I-4
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk,
providing "balance" to an overall portfolio and potentially achieving more
stable returns. Owning a portfolio of securities mitigates the individual risks
(and returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates.
As interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a
bond portfolio) to interest rate changes. It measures the weighted average
maturity of a bond's (or a bond portfolio's) cash flows, i.e., principal and
interest rate payments. Duration is expressed as a measure of time in years--the
longer the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate risk
only and not other risks, such as credit risk and, in the case of non-U.S.
dollar denominated securities, currency risk. Effective maturity measures the
final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them
when prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact
investment returns. Compounding is the effect of continuous investment on
long-term investment results, by which the proceeds of capital appreciation (and
income distributions, if elected) are reinvested to contribute to the overall
growth of assets. The long-term investment results of compounding may be greater
than that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. See "Management of the Fund--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of
the largest diversified financial services institutions in the world and, based
on total assets, the largest insurance company in North America as of December
31, 1995. Its primary business is to offer a full range of products and services
in three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.
Money Management. Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1996, Institutional Investor ranked Prudential the fifth largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1995. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential, (of which Prudential Mutual Funds is a key part)
manages over $190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is the fifteenth largest mutual fund
company in the country, with over 2.5 million shareholders invested in more than
50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
From time to time, there may be media coverage of portfolio managers
and other investment professionals associated with the Manager and the
Subadviser in national and regional publications, on television and in other
media. Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media organizations
such as The Wall Street Journal, The New York Times, Barron's and USA Today.
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(1) Prudential Investments, a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator Asset
Management LP, as the subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc., and BlackRock Financial
Management, Inc. as the subadviser to The BlackRock Government Income
Trust. There are multiple subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1994.
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Equity Funds. Forbes magazine listed Prudential Equity Fund among
twenty mutual funds on its Honor Roll in its mutual fund issue of August 28,
1995. Honorees are chosen annually among mutual funds (excluding sector funds)
which are open to new investors and have had the same management for at least
five years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Growth Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and
research intensive pursuit. A separate team of high yield bond analysts monitor
the 167 issues held in the Prudential High Yield Fund (currently the largest
fund of its kind in the country) along with 100 or so other high yield bonds,
which may be considered for purchase(3). Non-investment grade bonds, also known
as junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and
sophisticated research organization. Fourteen investment grade bond analysts
monitor the financial viability of approximately 1,750 different bond issuers in
the investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services
from almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to
collect detailed information on which to trade. From natural gas prices in the
Rocky Mountains to the results of local municipal elections, a Prudential
portfolio manager or trader is able to monitor it if it's important to a
Prudential mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and
foreign government securities a year. PIC seeks information from government
policy makers. In 1995, Prudential's portfolio managers met with several senior
U.S. and foreign government officials, on issues ranging from economic
conditions in foreign countries to the viability of index-linked securities in
the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data(4). On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets(5). Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities(6).
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
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(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts
managed by Prudential Mutual Fund Investment Management, a division of
PIC, for the year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment
Grade Debt, General U.S. Treasury, General U.S. Government and Mortgage
funds.
(6) As of December 31, 1994.
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INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI7.
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers8.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
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7 As of December 31, 1994.
8 On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual
analyst and weighting them based on the size of the voting institution. In
total, the magazine sends its survey to approximately 2,000 institutions
and a group of European and Asian institutions.
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