As filed with the Securities and Exchange Commission on November 27, 1998
Registration Nos. 33-48066
811-6677
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
POST-EFFECTIVE AMENDMENT NO. 11 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 12 [X]
(CHECK APPROPRIATE BOX OR BOXES)
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PRUDENTIAL INDEX SERIES FUND
(FORMERLY PRUDENTIAL DRYDEN FUND)
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(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
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(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
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(Name and Address of Agent for Service)
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COPIES TO:
PAUL H. DYKSTRA
GARDNER, CARTON & DOUGLAS
321 N. CLARK STREET
CHICAGO, ILLINOIS 60610-4795
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check
appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[X] on November 30, 1998 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a) of Rule 485
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of Securities Being Registered . . . Shares of beneficial interest, par
value $.001 per share.
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<CAPTION>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
LOCATION IN PRUDENTIAL STOCK
N-1A ITEM NO. INDEX FUND PROSPECTUS
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PART A
<S> <C>
Item 1. Cover Page ....................................................... Cover Page
Item 2 Synopsis ......................................................... Fund Highlights; Fund Expenses
Item 3. Condensed Financial Information .................................. Fund Expenses; Financial Highlights;
How the Fund Calculates Performance
Item 4. General Description of Registrant ................................ Cover Page; Fund Highlights; General
Information; How the Fund Invests
Item 5. Management of the Fund ........................................... Financial Highlights; Fund Highlights;
How the Fund is Managed; General
Information; Shareholder Guide
Item 5A. Management's Discussion of Fund Performance ...................... Financial Highlights
Item 6. Capital Stock and Other Securities ............................... Fund Highlights; How the Fund is
Managed; Taxes, Dividends and
Distributions; General Information;
Shareholder Guide
Item 7. Purchase of Securities Being Offered ............................. How the Fund is Managed; How the
Fund Values its Shares; Shareholder
Guide
Item 8. Redemption or Repurchase ......................................... Shareholder Guide; How the Fund
Values its Shares; General Information
Item 9. Pending Legal Proceedings ........................................ Not Applicable
LOCATION IN PROSPECTUS OF PRUDENTIAL BOND
MARKET INDEX FUND, PRUDENTIAL EUROPE INDEX
FUND, PRUDENTIAL PACIFIC INDEX FUND,
PRUDENTIAL SMALL-CAP INDEX FUND,
AND PRUDENTIAL STOCK INDEX FUND
Item 1. Cover Page ....................................................... Cover Page
Item 2. Synopsis ......................................................... Fund Highlights; Fund Expenses
Item 3. Condensed Financial Information .................................. Fund Expenses; Financial Highlights;
How Each Fund Calculates Performance
Item 4. General Description of Registrant ................................ Cover Page; Fund Highlights; General
Information; How the Funds Invest
Item 5. Management of the Fund ........................................... Financial Highlights; Fund Highlights;
How the Funds are Managed; General
Information; Shareholder Guide
Item 5A. Management's Discussion of Fund Performance ...................... Financial Highlights
Item 6. Capital Stock and Other Securities ............................... Fund Highlights; How the Funds are
Managed; Taxes, Dividends and
Distributions; General Information;
Shareholder Guide
Item 7. Purchase of Securities Being Offered ............................. How the Funds are Managed; How Each
Fund Values its Shares; Shareholder
Guide
Item 8. Redemption or Repurchase ......................................... Shareholder Guide; How Each Fund
Values its Shares; General Information
Item 9. Pending Legal Proceedings ........................................ Not Applicable
<PAGE>
PART B
Item 10. Cover Page ....................................................... Cover Page
Item 11. Table of Contents ................................................ Table of Contents
Item 12. General Information and History .................................. General Information
Item 13. Investment Objectives and Policies ............................... Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund ........................................... Trustees and Officers; Manager and
Subadviser; Distributor
Item 15. Control Persons and Principal Holders of Securities .............. Trustees and Officers
Item 16. Investment Advisory and Other Services ........................... Manager and Subadviser; Distributor;
Custodian, Transfer and Dividend
Disbursing Agent
Item 17. Brokerage Allocation and Other Practices ......................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities ............................... Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ..... Purchase and Redemption of Fund
Shares
Item 20. Tax Status ....................................................... Taxes, Dividends and Distributions
Item 21. Underwriters ..................................................... Distributor
Item 22. Calculation of Performance Data .................................. Performance and Yield Information
Item 23. Financial Statements ............................................. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Post-Effective Amendment
to the Registration Statement.
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PRUDENTIAL STOCK INDEX FUND
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PROSPECTUS DATED NOVEMBER 30, 1998
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Prudential Stock Index Fund (the Fund) is a series of Prudential Index Series
Fund (formerly Prudential Dryden 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, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated November 30, 1998, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to the Fund at the address or telephone number noted above.
The Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund.
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Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
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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.
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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 7.
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 7.
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 12. 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 October 31, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $68.2 billion. The
Prudential Investment Corporation (PIC), doing business as 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
13 and "How the Fund is Managed--Subadviser" at page 13.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as the
Distributor of the Fund's shares. The Distributor 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.
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2
<PAGE>
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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 18 and "Shareholder Guide--Shareholder Services" at
page 22.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or introducing
brokers for the Distributor (Dealers) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent). In each case, sales are made at the net asset value per share (NAV) next
determined after receipt of your purchase order by the Transfer Agent, a Dealer
or the Distributor. 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 an affiliate of the Distributor which
includes mutual funds as investment options and for which the Fund is an
available option, (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by an affiliate of the Distributor, for
whom Class Z shares of the Prudential Mutual Funds are an available investment
option, (iv) Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996 (a) were
Class Z shareholders of the Prudential Mutual Funds or (b) executed a letter of
intent to purchase Class Z shares of the Prudential Mutual Funds, (v) current
and former Directors/Trustees of the Prudential Mutual Funds (including the
Fund), (vi) employees of Prudential or Prudential Securities who participate in
a Prudential-sponsored employee savings plan and (vii) Prudential with an
investment of $10 million or more. Class I shares are offered to 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 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/or annuities products.
Dealers may charge their customers a separate fee for handling purchase
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
purchasing shares of the Fund. See "How the Fund Values its Shares" at page 15
and "Shareholder Guide--How to Buy Shares of the Fund" at page 18.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers two classes of shares, Class Z and Class I shares, that are
sold without an initial sales charge 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 expenses.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order.
Dealers may charge their customers a separate fee for handling sale
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
selling their shares. See "Shareholder Guide--How to Sell Your Shares" at page
20.
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.
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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
YEAR YEARS YEARS YEARS
---- ----- ----- -----
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class Z ...................................... $4 $13 $22 $51
Class I ...................................... $3 $10 $17 $38
The above example is based on expenses incurred during the fiscal year
ended September 30, 1998, 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
operating expenses of the Fund such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
(domestic and foreign) fees as reduced by the Manager's expense reimbursement.
- ----------
* 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 were
.53% and .36%, respectively, of the average net assets of Class Z and Class
I shares of the Fund for the fiscal year ended September 30, 1998. This
voluntary subsidy may be terminated at any time without notice.
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4
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==================================================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
==================================================================================================================
The following financial highlights for the two years ended September 30, 1998 have been audited by
PricewaterhouseCoopers LLP, independent accountants, and for the three years ended September 30, 1996 and the
period from November 5, 1992 through September 30, 1993, have been audited by other independent auditors, whose
reports thereon were unqualified. This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected
data for a Class Z share of beneficial interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report, which may be obtained without
charge. See "Shareholder Guide -- Shareholder Services -- Reports to Shareholders."
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS Z
-------------------------------------------------------------------
NOVEMBER 5,
1992(A)
YEAR ENDED SEPTEMBER 30, THROUGH
----------------------------------------------------- SEPTEMBER
1998 1997* 1996 1995 1994 30, 1993
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....... $21.86 $16.06 $14.22 $11.27 $11.12 $10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(b) ................... .15 .46 .25 .23 .26 .23
Net realized and unrealized gain
on investment transactions ............... 1.69 5.75 2.44 2.97 .11 .94
------ ------ ------ ------ ------ ------
Total from investment operations ....... 1.84 6.21 2.69 3.20 .37 1.17
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income ....... (.21) (.26) (.28) (.22) (.18) (.05)
Distributions from net realized gains ...... (.38) (.15) (.57) (.03) (.04) --
------ ------ ------ ------ ------ ------
Total distributions .................... (.59) (.41) (.85) (.25) (.22) (.05)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............. $23.11 $21.86 $16.06 $14.22 $11.27 $11.12
====== ====== ====== ====== ====== ======
TOTAL RETURN(D): ........................... 8.61% 39.34% 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............. $381,374 $185,881 $184,379 $101,945 $50,119 $27,142
Average net assets (000).................... $313,721 $254,644 $142,540 $ 71,711 $38,098 $18,807
Ratios to average net assets(b):
Expenses ................................. .40% .46% .60% .60% .60% .60%(c)
Net investment income .................... 1.30% 1.66% 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate .................... 1% 5% 2% 11% 2% 1%
- ----------
(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.
* Effective October 30, 1996, PIFM succeeded Prudential Institutional Fund Management, Inc. as
manager of the Fund.
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</TABLE>
5
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================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS I SHARES)
================================================================================
The following financial highlights have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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 I share
of beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. This 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."
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CLASS I
----------------------------
AUGUST 1,
1997(A)
YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............ $21.87 $21.87
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(d) ........................ .31 .06
Net realized and unrealized gain (loss)
on investment transactions .................... 1.55 (.06)
------ ------
Total from investment operations ............ 1.86 --
LESS DISTRIBUTIONS:
Dividends from net investment income ............ (.22) --
Distributions from net realized gains ........... (.38) --
------ ------
Total distributions ......................... (.60) --
------ ------
Net asset value, end of period .................. $23.13 $21.87
====== ======
TOTAL RETURN(B): ................................ 8.69% 0%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................. $639,408 $312,127
Average net assets (000) ........................ $505,605 $296,788
Ratios to average net assets: (d)
Expenses ...................................... .30% .30%(c)
Net investment income ......................... 1.42% 1.73%(c)
Portfolio turnover rate ......................... 1% 5%
- ----------
(a) Commencement of offering of Class I shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy.
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6
<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. As with an investment in
any mutual fund, an investment in this Fund can decrease in value and you can
lose money.
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,
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.
The Fund may not hold all of the issues that comprise the S&P 500 Index
because of the costs involved. Instead, the Fund will attempt to hold a
representative sample of the securities in the Index, which will be selected
utilizing a statistical technique known as "portfolio optimization." Under this
technique, each stock is considered for inclusion in the portfolio based on its
contribution to certain capitalization, industry and fundamental investment
characteristics. The Fund's portfolio is constructed so that, in the aggregate,
the capitalization, industry and fundamental investment characteristics resemble
those of the S&P 500 Index. Over time, portfolio composition is altered (or
"rebalanced") to reflect changes in the characteristics of the Index.
The investment adviser believes that this investment approach will provide
an effective method of tracking the performance of the S&P 500 Index.
Nevertheless, the investment adviser 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. The investment adviser 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
7
<PAGE>
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.
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
include common stocks, preferred stocks, securities convertible or exchangeable
for common stocks or preferred stocks, equity investments in partnerships, joint
ventures, and other forms of non-corporate investments, American Depositary
Receipts (ADRs), American Depositary Shares (ADSs) and warrants and rights
exercisable for equity securities. See "Investment Objectives and
Policies--Investment Policies Applicable to Each of the Funds--Convertible
Securities, Warrants and Rights" in the Statement of Additional Information.
ADRs and ADSs are U.S. dollar-denominated certificates or shares 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.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest a portion of its assets in equity securities of foreign
issuers denominated in U.S. currency. ADRs are not deemed to be securities of
foreign issuers.
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
8
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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.
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 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 up to 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.
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REPURCHASE AGREEMENTS
The Fund may 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 PIFM pursuant to an order of the Commission.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities, the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100%, determined daily, of the market value of the securities loaned which are
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. As with any extension of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. As a matter
of fundamental policy, the Fund will not lend more than 30% of the value of its
total assets. The Fund may pay reasonable administration and custodial fees in
connection with a loan. See "Investment Objectives and Policies--Investment
Policies Applicable to Each of the Funds--Securities Lending" in the Statement
of Additional Information.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, 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, Dividends and Distributions" in the Statement of Additional Information.
New financial products and risk management techniques continue to be developed,
and the Fund may use these new investments and techniques to the extent
consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON 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
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<PAGE>
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.
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) segregates cash or other liquid
assets in an amount equal to or greater than its obligation under the option.
Under the first circumstance, the Fund's losses are limited because it owns the
underlying position; under the second circumstance, in the case of a written
call option, the Fund's losses are potentially unlimited. There is no limitation
on the amount of call options the Fund may write. See "Investment 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, Dividends and Distributions" 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 market 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
requirements of the Commission and coverage requirements of the CFTC. 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 other
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.
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 ITS INVESTORS, 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;
(5) the risk that the counterparty may be unable to complete the transaction
and (6) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate liquid
assets in connection with hedging transactions. See "Taxes, Dividends and
Distributions" 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 SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended September 30, 1998, total expenses as a
percentage of average net assets were .40% and .30% for Class Z and Class I
shares, respectively, after the Manager's expense reimbursement. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS. PIFM is organized in New York as a
limited liability company. The Fund paid management fees to PIFM of .30 of 1% of
the Fund's average net assets during the fiscal year ended September 30, 1998.
See "Manager and Subadviser" in the Statement of Additional Information.
As of October 31, 1998, PIFM served as the manager to 67 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies, with aggregate
assets of approximately $68.2 billion.
Under the Management Agreement for the Fund, PIFM manages the investment
operations of the Fund and also administers the Company's business affairs. See
"Manager and Subadviser" in the Statement of Additional Information.
SUBADVISER
THE PRUDENTIAL INVESTMENT CORPORATION (PIC), GATEWAY CENTER TWO, 4TH FLOOR,
NEWARK, NEW JERSEY 07102-1084, 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 THE
SUBADVISER.
Under the Subadvisory Agreement, the Subadviser, 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. The Subadviser
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, 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.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE SHARES OF THE FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL. Prudential Securities Incorporated (Prudential Securities), One
Seaport Plaza, New York, New York 10292 previously served as the Distributor of
the Fund's shares. It is an indirect, wholly owned subsidiary of Prudential.
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<PAGE>
UNDER A DISTRIBUTION AGREEMENT, 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, Dealers or financial institutions which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
the Distributor 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 and other persons which distribute shares of the Fund. Such
payments may be calculated by reference to the NAV of shares sold by such
persons or otherwise.
FEE WAIVERS AND SUBSIDY
PIFM has agreed to subsidize the Fund's operating expenses so that total
Fund operating expenses do not exceed .40% and .30% 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. This voluntary subsidy may be terminated
at any time without notice. Fee waivers and expense subsidies will increase the
Fund's total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund provided that the commissions, fees or other remuneration
they receive are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Company. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000 and expect that their systems, and those of
outside service providers, will be adapted in time for that event.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront Year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held by
the Fund.
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================================================================================
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. 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.
================================================================================
HOW THE FUND CALCULATES PERFORMANCE
================================================================================
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. These
figures are based on historical earnings and are not intended to indicate future
performance. The total return shows how much an investment in the Fund would
have increased (decreased) over a specified period of time (i.e., one, five or
ten years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The aggregate total return reflects actual
performance over a stated period of time. Average annual total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. Average annual total return smooths out variations in performance.
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
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. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See
"Taxes, Dividends and Distributions" in the Statement of Additional Information.
15
<PAGE>
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, Dividends and Distributions" 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.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to shareholders whether or not reinvested. Any net capital gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses) distributed to shareholders will be taxable as long-term capital gains
to the shareholder, whether or not reinvested and regardless of the length of
time a shareholder has owned his or her shares. The maximum federal long-term
capital gains rate for individual shareholders for securities held more than one
year is 20% and the maximum statutory federal income tax rate for ordinary
income is 39.6%. The maximum statutory federal long-term capital gains rate and
the maximum statutory federal tax rate for ordinary income for corporate
shareholders currently is 35%. Both regular and capital gains dividends are
taxable to shareholders in the year in which received, whether they are received
in cash or in additional shares. In addition, certain dividends declared by the
Fund will be treated as received by shareholders on December 31 of the year the
dividends are declared. This rule applies to dividends declared by the Fund in
October, November or December of a calendar year, payable to shareholders of
record on a date in any such month, if such dividends are paid during January of
the following calendar year.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts and income from certain
other sources will not be eligible for the corporate dividends-received
deduction. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as a long-term
capital gain or loss if the shares have been held more than one year and
otherwise as a short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. With respect to non-corporate shareholders gain or loss on
shares held more than one year will be considered in determining a holder's
adjusted net capital gain subject to a maximum statutory tax rate of 20%.
WITHHOLDING TAXES
Under the U.S. Treasury regulations, the Fund is required to withhold and
remit to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable on the accounts of certain shareholders who fail to furnish
their correct tax identification numbers to the IRS on IRS Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital gains
distributions (but not redemption proceeds)
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<PAGE>
payable to shareholders who are otherwise subject to backup withholding.
Dividends of net investment income and short-term gains paid to a foreign
shareholder will generally be subject to U.S. withholding tax at the rate of 30%
(or lower treaty rate).
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, 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 BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
================================================================================
GENERAL INFORMATION
================================================================================
DESCRIPTION OF SHARES
THE 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 FIVE SERIES OR
PORTFOLIOS: THE FUND, PRUDENTIAL BOND MARKET INDEX FUND, PRUDENTIAL EUROPE INDEX
FUND, PRUDENTIAL PACIFIC INDEX FUND AND PRUDENTIAL SMALL-CAP INDEX FUND. Each
fund, other than the Fund, offers one class of shares. The Fund offers two
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.
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. 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 Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
17
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================================================================================
SHAREHOLDER GUIDE
================================================================================
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE FUND,
THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE
TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK,
NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS SPONSORED BY PRUDENTIAL
RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT REPRESENTATIVE FOR MORE
INFORMATION ABOUT PURCHASING SHARES OF THE FUND. The purchase price is the NAV
next determined following receipt of an order in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Distributor, your Dealer or the Transfer Agent. Payment may be
made by wire, check or through your brokerage account. 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 the Transfer Agent or the
Distributor. If a share certificate is desired, it must be requested in writing
for each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in Fund shares may be subject to
postage and handling charges imposed by your Dealer. Any such charges are
retained by the Dealer and are not remitted to the Fund.
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," "Prudential Retirement Programs" and "PruArray Association Benefit
Plans" below, (ii) participants in any fee-based program or trust program
sponsored by an affiliate of the Distributor which includes mutual funds as
investment options and for which the Fund is an available option, (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by an affiliate of the Distributor for whom Class Z shares of the Prudential
Mutual Funds are an available investment option, (iv) Benefit Plans (as defined
below) for which an affiliate of the Distributor provides administrative or
recordkeeping services and as of September 20, 1996 (a) were Class Z
shareholders of the Prudential Mutual Funds or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds, (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund),
(vi) employees of Prudential or Prudential Securities who participate in a
Prudential-sponsored employee savings plan and (vii) Prudential with an
investment of $10 million or more.
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, deferred compensation plans 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.
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<PAGE>
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must complete an application and 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 (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Index Series Fund, Prudential Stock Index Fund,
specifying on the wire the account number assigned by PMFS and your name and
identifying the class in which you are eligible to invest.
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Index Series
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.
RIGHTS 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 Prudential,
Prudential Securities or its subsidiaries (Prudential Securities 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. Class Z 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 provides
administrative or recordkeeping services, provided that (i) the plan has at
least $1 million in existing assets or 250 eligible employees and (ii) the Fund
is an available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation plans and annuity plans under Sections 457
or 403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All plans of a company (or affiliated companies under common
control) for which Prudential provides administrative or recordkeeping services
are aggregated in meeting the $1 million threshold, provided that Prudential has
been notified in advance of the entitlement of the waiver of the sales charge
based on aggregated assets. The term "existing assets" as used herein includes
stock issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray Plan
(Participating Funds). "Existing assets" also include monies invested in The
Guaranteed Investment Account (GIA), a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential, and units of the Stable Value Fund (SVF), an unaffiliated
bank collective fund. Shares of the Fund may also be purchased by plans that
have monies invested
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<PAGE>
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 Plan provided that the Association enters into a written agreement with
Prudential. Such Benefit Plans or non-qualified plans may purchase shares of the
Fund without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plan(s) 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 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 Transfer Agent and (ii)
spouses of employees who open an IRA account with the Transfer Agent. The
program is offered to companies that have at least 250 eligible employees.
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 NAV of shares sold by such persons or otherwise.
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 (IN
ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION WITH
INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER. See
"How the Fund Values its Shares." If you are redeeming your shares through a
Dealer, your Dealer must receive your sell order before the Fund computes its
NAV for that day (i.e., 4:15 P.M., New York time) in order to receive that day's
NAV. Your Dealer will be responsible for furnishing all necessary documentation
to the Distributor and may charge you for its services in connection with
redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR
YOUR DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION
IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010, the Distributor or your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray Plan, if the proceeds of the redemption are
invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
20
<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD
SHARES THROUGH A DEALER, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR ACCOUNT, AT YOUR DEALER, UNLESS YOU INDICATE OTHERWISE. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (b), (c) or(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE
PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING
SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The 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 NAV 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 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 AT NAV 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.
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.
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<PAGE>
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Participants in Prudential Securities' 401(k)
plan for which the Fund's Class Z shares are an available option and who wish to
transfer their Class Z shares out of the Prudential Securities 401(k) Plan
following separation from service (i.e., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at the NAV of other Prudential Mutual Funds.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder 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 your Dealer, 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 available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from your Dealer or the Transfer
Agent. If you are considering adopting such a plan, you should consult with your
own legal or tax adviser with respect to the establishment and maintenance of
such a plan.
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.
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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, 100 Mulberry Street, 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, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A. at ( )
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 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.
The Prudential High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
---------------------
TAX-EXEMPT BOND FUNDS
---------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
------------
GLOBAL FUNDS
------------
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
------------
EQUITY FUNDS
------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
------------------
MONEY MARKET FUNDS
------------------
o Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
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>
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 ..................................... 7
Investment Objective and Policies ...................... 7
Other Investments and Policies ......................... 9
Hedging and Return Enhancement Strategies .............. 10
Investment Restrictions ................................ 12
HOW THE FUND IS MANAGED .................................. 13
Manager ................................................ 13
Subadviser ............................................. 13
Distributor ............................................ 13
Fee Waivers and Subsidy ................................ 14
Portfolio Transactions ................................. 14
Custodian and Transfer and
Dividend Disbursing Agent ............................ 14
Year 2000 Readiness Disclosure ......................... 14
HOW THE FUND VALUES ITS SHARES ........................... 15
HOW THE FUND CALCULATES PERFORMANCE ...................... 15
TAXES, DIVIDENDS AND DISTRIBUTIONS ....................... 15
GENERAL INFORMATION ...................................... 17
Description of Shares .................................. 17
Additional Information ................................. 17
SHAREHOLDER GUIDE ........................................ 18
How to Buy Shares of the Fund .......................... 18
How to Sell Your Shares ................................ 20
How to Exchange Your Shares ............................ 21
Shareholder Services ................................... 22
THE PRUDENTIAL MUTUAL FUND FAMILY ........................ A-1
- ---------------------------------------------------------------
MF174A
- ---------------------------------------------------------------
Class Z: 74431F-20-9
CUSIP No.:
Class I: 74431F-86-0
- ---------------------------------------------------------------
PRUDENTIAL
STOCK
INDEX FUND
- --------------------
PROSPECTUS
NOVEMBER 30, 1998
WWW.PRUDENTIAL.COM
- --------------------
(Logo PRUDENTIAL INVESTMENTS)
<PAGE>
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 30, 1998
- --------------------------------------------------------------------------------
Prudential Index Series Fund (the Company) is a diversified, open-end,
management investment company comprised of five separate portfolios, or series
(each a Fund and collectively, the Funds). This Prospectus relates to the
following Funds: Prudential Bond Market Index Fund, Prudential Europe Index
Fund, Prudential Pacific Index Fund, Prudential Small-Cap Index Fund and
Prudential Stock Index Fund. Each Fund and its corresponding investment
objective is described below:
FUND INVESTMENT OBJECTIVE
---- --------------------
Prudential Bond Market Seeks to provide investment results that correspond
Index Fund to the total return performance of a broad-based
index of fixed-income securities, currently the
Lehman Brothers Aggregate Index.
Prudential Europe Seeks to provide investment results that correspond
Index Fund to the price and yield performance of a broad-based
index of securities of European issuers, currently
the Morgan Stanley Capital International Europe
Index.
Prudential Pacific Seeks to provide investment results that correspond
Index Fund to the price and yield performance of a broad-based
index of securities of issuers in the Pacific
region, currently the Morgan Stanley Capital
International Pacific Free Index.
Prudential Small-Cap Seeks to provide investment results that correspond
Index Fund to the price and yield performance of a broad-based
index of small cap stocks, currently the Standard &
Poor's 600 Small Capitalization Stock Index.
Prudential Stock Seeks to provide investment results that correspond
Index Fund 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 investment objective of any Fund will be
achieved. See "How the Funds Invest--Investment Objectives and Policies." The
Funds' address is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077, and their telephone number is (800) 225-1852. This Prospectus sets
forth concisely the information about the Funds that a prospective investor
should know before investing and is available at the Web site of The Prudential
Insurance Company of America (http://www.prudential.com). Additional information
about the Funds has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated November 30, 1998,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Funds at the address or telephone number noted above.The Commission maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Funds.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
- --------------------------------------------------------------------------------
WHAT IS EACH FUND?
The Company is comprised of five portfolios or series: Prudential Bond
Market Index Fund, Prudential Europe Index Fund, Prudential Pacific Index Fund,
Prudential Small-Cap Index Fund and Prudential Stock Index Fund (each a Fund and
collectively, the Funds). Technically, the Company is a diversified, open-end,
management investment company comprised of separate series, each of which
operates as a separate 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.
WHAT IS THE INVESTMENT OBJECTIVE OF EACH FUND?
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; currently, the Fund uses the
Lehman Brothers Aggregate 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; currently, the Fund uses the Morgan Stanley
Capital International Europe Index (MSCI-Europe 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; currently, the
Fund uses the Morgan Stanley Capital International Pacific Free Index
(MSCI-Pacific Free Index) for that purpose. 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; currently, the Fund uses the Standard & Poor's 600 Small
Capitalization Stock Index (S&P 600 Index) for that purpose. 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 S&P 500 Index.
There can be no assurance that the investment objective of any Fund will be
achieved. See "How the Funds Invest--Investment Objectives and Policies" at page
12.
WHAT ARE THE FUNDS' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Funds' performance will not precisely correspond to the performance of
the index whose performance each Fund seeks to replicate. Each Fund will attempt
to achieve a correlation between its performance and that of the applicable
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 a Fund's return to be lower than the return of the index whose performance
the Fund seeks to replicate. See "How the Funds Invest--Investment Objectives
and Policies" at page 12.
Each Fund may engage in various hedging and return enhancement strategies
and use derivatives. See "How the Funds Invest--Hedging and Return Enhancement
Strategies--Risks of Hedging and Return Enhancement Strategies" at page 22. As
with an investment in any mutual fund, an investment in a Fund can decrease in
value and you can lose money.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
WHO MANAGES THE FUNDS?
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
.25 of 1% of average daily net assets of Prudential Bond Market Index Fund, .40
of 1% of average daily net assets of Prudential Europe Index Fund, .40 of 1% of
average daily net assets of Prudential Pacific Index Fund, .30 of 1% of average
daily net assets of Prudential Small-Cap Index Fund and .30 of 1% of average
daily net assets of Prudential Stock Index Fund. As of October 31, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $68.2 billion. The
Prudential Investment Corporation (PIC), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), furnishes investment
advisory services in connection with the management of the Funds under
Subadvisory Agreements with PIFM. See "How the Funds are Managed--Manager" at
page 22 and "How the Funds are Managed--Subadviser" at page 23.
WHO DISTRIBUTES THE FUNDS' SHARES?
Prudential Investment Management Services LLC (the Distributor), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Funds' shares. The Distributor incurs the expense of
distributing the Funds' shares under a Distribution Agreement with the Company,
none of which is reimbursed or paid for by the Funds. See "How the Funds are
Managed--Distributor" at page 23.
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 a Fund" at page 28 and "Shareholder Guide--Shareholder Services"
at page 32.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Funds through the Distributor or brokers or
dealers that have entered into agreements to act as participating or introducing
brokers for the Distributor (Dealers) or directly from the Funds, through their
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent). In each case, sales are made at the net asset value per share (NAV) next
determined after receipt of your purchase order by the Transfer Agent or the
Distributor. Class Z shares of each 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 an affiliate of the Distributor which
includes mutual funds as investment options and for which the Fund is an
available option, (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by an affiliate of the Distributor for
whom Class Z shares of the Prudential Mutual Funds are an available investment
option, (iv) Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services 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
Funds), (vi) employees of Prudential or Prudential Securities who participate in
a Prudential-sponsored employee savings plan and (vii) Prudential with an
investment of $10 million or more. Class I shares of Prudential Stock Index Fund
are offered to 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 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/or annuities products. Dealers may charge their customers a separate fee for
handling purchase transactions.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about purchasing shares
of the Funds. See "How Each Fund Values its Shares" at page 25 and "Shareholder
Guide--How to Buy Shares of a Fund" at page 28.
WHAT ARE MY PURCHASE ALTERNATIVES?
Prudential Stock Index Fund offers two classes of shares, Class Z and Class
I shares, sold without an initial or contingent deferred sales charge to a
limited group of investors. Class I shares must be held in an ominibus account
and are subject to nominal transfer agency fees or expenses. Each of the other
Funds offers one class of shares (Class Z shares), sold without an initial or
contingent deferred sales charge to a limited group of investors. Shares of the
Funds are not subject to any ongoing service or distribution expenses.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after the
Distributor, your Dealer or the Transfer Agent receives your sell order. Dealers
may charge their customers a separate fee for handling sale transactions.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
shares. See "Shareholder Guide--How to Sell Your Shares" at page 30.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Each Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions of a Fund will be automatically reinvested in additional shares of
that 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 25.
- --------------------------------------------------------------------------------
4
<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
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets) PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
BOND MARKET EUROPE PACIFIC SMALL-CAP STOCK
INDEX FUND INDEX FUND INDEX FUND INDEX FUND INDEX FUND
----------- ---------- ---------- ---------- -------------------
CLASS Z CLASS Z CLASS Z CLASS Z CLASS Z CLASS I
----------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees ............................ .25% .40% .40% .30% .30% .30%
12b-1 Fees ................................. None None None None None None
Other Expenses (After Reimbursement) ....... .15% .20% .20% .20% .10% .00%
--- --- --- --- --- ---
Total Fund Operating Expenses
(After Reimbursement) ..................... .40% .60% .60% .50% .40% .30%
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 3 5 10
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:
<S> <C> <C> <C> <C>
PRUDENTIAL BOND MARKET INDEX FUND
Class Z .......................................................................... $4 $13 $22 $51
PRUDENTIAL EUROPE INDEX FUND
Class Z .......................................................................... $6 $19 $33 $75
PRUDENTIAL PACIFIC INDEX FUND
Class Z .......................................................................... $6 $19 $33 $75
PRUDENTIAL SMALL-CAP INDEX FUND
Class Z .......................................................................... $5 $16 $28 $63
PRUDENTIAL STOCK INDEX FUND
Class Z .......................................................................... $4 $13 $22 $51
Class I .......................................................................... $3 $10 $17 $38
</TABLE>
The above example is based on actual data for the fiscal year ended
September 30, 1998 for the Funds. 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 a Fund will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Funds are Managed." "Other Expenses" includes
operating expenses for the Funds such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
(domestic and foreign) fees as reduced by the Manager's expense reimbursement.
- ----------
* The Manager has agreed to reimburse each Fund so that Total Fund Operating
Expenses do not exceed .40% and .30%, respectively, for Class Z and Class I
shares of Prudential Stock Index Fund and .40%, .60%, .60% and .50% of the
average net assets of Prudential Bond Market Index Fund, Prudential Europe
Index Fund, Prudential Pacific Index Fund and Prudential Small-Cap Index
Fund, respectively. Total Fund Operating Expenses before reimbursement were
.53% and .36%, respectively, of the average net assets of Class Z and Class
I shares of Prudential Stock Index Fund and .91%, 2.63%, 2.02% and 1.68% of
the average net assets of Prudential Bond Market Index Fund, Prudential
Europe Index Fund, Prudential Pacific Index Fund and Prudential Small-Cap
Index Fund, respectively, for the fiscal year ended September 30, 1998.
This voluntary subsidy may be terminated at any time without notice.
- --------------------------------------------------------------------------------
5
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(PRUDENTIAL BOND MARKET INDEX FUND - CLASS Z SHARES)
================================================================================
The following financial highlights have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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 Z share
of beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. This information is based
on data contained in the financial statements. Further performance information
is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z
-------------------
OCTOBER 1, 1997(a)
THROUGH
SEPTEMBER 30, 1998
-------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................. $ 10.00
--------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(d) ............................................................. .55
Net realized and unrealized gain on investment transactions .......................... .52
--------
Total from investment operations .................................................... 1.07
--------
LESS DISTRIBUTIONS
Dividends from net investment income ................................................ (.15)
Distribution from net realized gains ................................................ (.01)
(.16)
Net asset value, end of period ....................................................... $ 10.91
========
TOTAL RETURN(B): ..................................................................... 10.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ...................................................... $39,790
========
Average net assets (000) ............................................................. $33,637
========
Ratios to average net assets: (d)
Expenses ............................................................................ .40%(c)
Net investment income ............................................................... 5.68%(c)
Portfolio turnover rate .............................................................. 418%
</TABLE>
- ----------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of the period reported and includes reinvestment of dividends
and distributions. Total returns for periods of less than a full year are
not annualized.
(c) Annualized.
(d) Net of expense subsidy.
- --------------------------------------------------------------------------------
6
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(PRUDENTIAL EUROPE INDEX FUND - CLASS Z SHARES)
================================================================================
The following financial highlights have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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 Z share
of beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. This 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."
- --------------------------------------------------------------------------------
CLASS Z
------------------
OCTOBER 1, 1997(A)
THROUGH
SEPTEMBER 30, 1998
------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(d) ................................... .18
Net realized and unrealized gain (loss) on investment
and foreign currency transactions ......................... .53
------
Total from investment operations ......................... .71
------
LESS DISTRIBUTIONS
Dividends from net investment income ...................... (.07)
Net asset value, end of period ............................. $10.64
======
TOTAL RETURN(b): ........................................... 7.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............................ $18,026
Average net assets (000) ................................... $17,728
Ratios to average net assets: (d)
Expenses .................................................. .60%(c)
Net investment income ..................................... 1.64%(c)
Portfolio turnover rate .................................... 4%
- ----------
(a) Commencement of investment operations.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of expense subsidy.
- --------------------------------------------------------------------------------
7
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(PRUDENTIAL PACIFIC INDEX FUND - CLASS Z SHARES)
================================================================================
The following financial highlights have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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 Z share
of beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. This information is based
on data contained in the financial statements. Further performance information
is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
CLASS Z
---------------------------------------
SEPTEMBER 24, 1997(A)
YEAR ENDED THROUGH
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.88 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(d) 0.06 0.02
Net realized and unrealized gain (loss) on investment
and foreign currency transactions (3.55) (0.14)
------ -------
Total from investment operations (3.49) (0.12)
------ -------
Less distributions
Dividends from net investment income (.01) --
Net asset value, end of period $ 6.38 $ 9.88
====== ======
TOTAL RETURN(b): (35.54)% (1.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $16,441 $24,699
Average net assets (000) $19,827 $24,802
Ratios to average net assets: (d)
Expenses .60% .60%(c)
Net investment income .78% 13.14%(c)
Portfolio turnover rate 2% 0%
</TABLE>
- -----------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy.
- --------------------------------------------------------------------------------
8
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(PRUDENTIAL SMALL-CAP INDEX FUND - CLASS Z SHARES)
================================================================================
The following financial highlights have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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 Z share
of beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. This 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."
- --------------------------------------------------------------------------------
CLASS Z
OCTOBER 1, 1997(A)
THROUGH
SEPTEMBER 30, 1998
------------------
PER SHARE OPERATING PERFOMANCE:
Net asset value, beginning of period $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(c) .04
Net realized and unrealized gain (loss) on
investment transactions (1.94)
-------
Total from investment operations (1.90)
-------
LESS DISTRIBUTIONS:
Dividends from net investment income (.01)
Net asset value, end of period $ 8.09
=======
TOTAL RETURN(B): (18.98)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $20,256
=======
Average net assets (000) $22,676
=======
Ratios to average net assets: (c)
Expenses .50%
Net investment income .48%
Portfolio turnover rate .56%
- ---------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Net of expense subsidy.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(PRUDENTIAL STOCK INDEX FUND-CLASS Z SHARES)
- --------------------------------------------------------------------------------
The following financial highlights for the two years ended September 30,
1998 have been audited by PricewaterhouseCoopers LLP, independent accountants,
and for the three years ended September 30, 1996 and the period from November 5,
1992 through September 30, 1993 have been audited by other independent auditors,
whose reports thereon were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class Z share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z
--------------------------------------------------------------------------
NOVEMBER 5,
1992(A)
YEAR ENDED SEPTEMBER 30, THROUGH
-------------------------------------------------------- SEPTEMBER
1998 1997* 1996 1995 1994 30, 1993
----- ----- ---- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...$ 21.86 $ 16.06 $ 14.22 $ 11.27 $ 11.12 $10.00
-------- -------- ------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(b) ............... .15 .46 .25 .23 .26 .23
Net realized and unrealized gain
on investment transactions ............ 1.69 5.75 2.44 2.97 .11 .94
-------- -------- ------- -------- -------- ------
Total from investment operations ...... 1.84 6.21 2.69 3.20 .37 1.17
-------- -------- ------- -------- -------- ------
LESS DISTRIBUTIONS:
Dividends from net investment income ... (.21) (.26) (.28) (.22) (.18) (.05)
Distributions from net realized gains .. (.38) (.15) (.57) (.03) (.04) --
-------- -------- ------- -------- -------- ------
Total distributions ................... (.59) (.41) (.85) (.25) (.22) (.05)
-------- -------- ------- -------- -------- ------
Net asset value, end of period .........$ 23.11 $ 21.86 $16.06 $14.22 $ 11.27 $ 11.12
======== ======== ======= ======== ======== =======
TOTAL RETURN(D): ....................... 8.61% 39.34% 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ........$381,374 $185,881 $184,379 $101,945 $50,119 $27,142
Average net assets (000) ...............$313,721 $254,644 $142,540 $ 71,711 $38,098 $18,807
Ratios to average net assets:(b)
Expenses .............................. .40% .46% .60% .60% .60% .60%(c)
Net investment income ................. 1.30% 1.66% 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate ................ 1% 5% 2% 11% 2% 1%
</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.
* Effective October 30, 1996, PIFM succeeded Prudential Institutional
Fund Management, Inc. as manager of the Fund.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(PRUDENTIAL STOCK INDEX FUND - CLASS I SHARES)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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 I share
of beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. This information is based
on data contained in the financial statements. Further performance information
is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------
AUGUST 1, 1997(a)
YEAR ENDED THROUGH
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......... $21.87 $21.87
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(d) ..................... .31 .06
Net realized and unrealized gain (loss) on
investment transactions ..................... 1.55 (.06)
------ ------
Total from investment operations ............ 1.86 --
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income ......... (.22) --
Distributions from net realized gains ........ (.38) --
------ ------
Total distributions ......................... (.60) --
------ ------
Net asset value, end of period ............... $23.13 $21.87
====== ======
TOTAL RETURN(b): ............................. 8.69% 0%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .............. $639,408 $312,127
Average net assets (000) ..................... $505,605 $296,788
Ratios to average net assets: (d)
Expenses .................................... .30% .30%(c)
Net investment income ....................... 1.42% 1.73%(c)
Portfolio turnover rate ...................... 1% 5%
</TABLE>
- ----------
(a) Commencement of offering of Class I shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy.
- --------------------------------------------------------------------------------
11
<PAGE>
================================================================================
HOW THE FUNDS INVEST
================================================================================
INVESTMENT OBJECTIVES AND POLICIES
THE COMPANY IS COMPRISED OF FIVE SEPARATE SERIES (EACH A FUND AND
COLLECTIVELY, THE FUNDS): PRUDENTIAL BOND MARKET INDEX FUND, PRUDENTIAL EUROPE
INDEX FUND, PRUDENTIAL PACIFIC INDEX FUND, PRUDENTIAL SMALL-CAP INDEX FUND AND
PRUDENTIAL STOCK INDEX FUND.
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 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 MSCI-EUROPE 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 MSCI-PACIFIC FREE INDEX FOR
THAT PURPOSE.
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 S&P 600 INDEX FOR THAT PURPOSE.
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 S&P 500 INDEX.
THERE CAN BE NO ASSURANCE THAT THE OBJECTIVE OF ANY FUND WILL BE ACHIEVED.
See "Investment Objectives and Policies" in the Statement of Additional
Information. As with an investment in any mutual fund, an investment in any of
the Funds can decrease in value and you can lose money.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL STOCK INDEX FUND IS FUNDAMENTAL.
EACH OTHER FUND'S INVESTMENT OBJECTIVE AND THE INVESTMENT POLICIES (OTHER THAN
THEIR INVESTMENT RESTRICTIONS) OF ALL FUNDS ARE NOT FUNDAMENTAL AND SO MAY BE
CHANGED BY THE BOARD OF TRUSTEES (TRUSTEES) WITHOUT SHAREHOLDER APPROVAL.
HOWEVER, SHAREHOLDERS WOULD BE NOTIFIED PRIOR TO A MATERIAL CHANGE IN A FUND'S
INVESTMENT OBJECTIVE AND POLICIES. THE BROAD-BASED INDICES USED BY THE FUNDS
(EXCEPT PRUDENTIAL STOCK INDEX FUND) MAY BE CHANGED FROM TIME TO TIME AT THE
DISCRETION OF THE SUBADVISER UNDER THE SUPERVISION OF THE TRUSTEES.
The Funds are 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,
the investment adviser for the Funds, using a "passive" or indexing investment
approach, will attempt to approximate the investment performance of the
respective indices by holding a portfolio of stocks or bonds selected through
statistical procedures. The Funds are managed without regard to tax
ramifications. Each Fund pursues its objective through the investment policies
described below. While each Fund will seek to achieve its objective, the Funds
will differ with respect to the degree of risk that they involve.
PRUDENTIAL BOND MARKET INDEX FUND
Prudential Bond Market Index Fund seeks 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
12
<PAGE>
the Lehman Brothers Aggregate Index for that purpose. The Lehman Brothers
Aggregate Index is an unmanaged index that measures the total return (capital
change plus income) provided by a universe of fixed-income securities, weighted
by market value. The Fund is neither sponsored by nor affiliated with Lehman
Brothers Inc. See "Investment Objectives and Policies--Investment Policies
Applicable to Prudential Bond Market Index Fund" in the Statement of Additional
Information.
To achieve its investment objective, Prudential Bond Market Index Fund will
purchase securities that as a group reflect the performance of the Lehman
Brothers Aggregate Index. The Fund intends to hold a representative sample of
the securities that reflect the three major classes of fixed-income investments
in the Lehman Brothers Aggregate Index: U.S. Treasury and Government agency
securities, investment-grade corporate debt obligations and mortgage-backed
securities. The securities included in the Index must be U.S. dollar-denominated
and investment-grade, and have a fixed rate coupon, a remaining maturity or
average life of at least one year and generally have an outstanding market value
of at least $100 million. In addition, from time to time adjustments may be made
in the holdings of the Fund due to factors which may include changes in the
composition of the Lehman Brothers Aggregate Index. As of September 30, 1998,
U.S. Treasury and agency securities comprised 42% and 4%, respectively, of the
Index's total market value, corporate bonds comprised 21%, asset-backed
securities comprised 2% and mortgage-backed securities comprised 31%.
Prudential Bond Market Index Fund intends to invest at least 80% of its
total assets in the types of securities included in the Lehman Brothers
Aggregate Index in the same proportions as the Index. The Fund may invest the
balance of its assets in: (i) money market instruments; (ii) put and call
options on fixed-income securities and bond indices; and (iii) bond futures
contracts and options thereon.
PRUDENTIAL EUROPE INDEX FUND
Prudential Europe Index Fund seeks 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 MSCI-Europe Index for that purpose. The MSCI-Europe Index is an unmanaged,
diversified, capitalization weighted index currently consisting of the equity
securities of 592 companies located in 15 developed European countries. These
countries are: Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The Fund is neither sponsored by nor affiliated with Morgan Stanley &
Co. Incorporated. See "Investment Objectives and Policies--Investment Policies
Applicable to Prudential Europe Index Fund" in the Statement of Additional
Information.
To achieve its investment objective, Prudential Europe Index Fund will
purchase the equity securities that as a group reflect the price and yield
performance of the MSCI-Europe Index. The Fund intends to invest in a
representative sample of the stocks included in the MSCI-Europe Index in
approximately the same proportions as they are represented in that index. In
addition, from time to time adjustments may be made in the holdings of the Fund
due to factors which may include changes in the composition of the MSCI-Europe
Index. The United Kingdom, Germany and France dominate the MSCI-Europe Index,
with 31.1%, 15.1% and 12.9%, respectively, of the market capitalization of the
Index as of September 30, 1998.
Prudential Europe Index Fund intends to invest at least 80% of its total
assets in securities included in the MSCI-Europe Index in the same proportions
as the Index. The Fund may invest the balance of its assets in: (i) money market
instruments; (ii) equity-related securities; (iii) put and call options on
securities, stock indices and foreign currencies; (iv) forward foreign currency
exchange contracts; and (v) financial futures contracts on stocks and currencies
and options thereon.
PRUDENTIAL PACIFIC INDEX FUND
Prudential Pacific Index Fund seeks 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
13
<PAGE>
MSCI-Pacific Free Index for that purpose. The MSCI-Pacific Free Index is an
unmanaged, diversified, capitalization weighted index currently consisting of
508 equity securities listed on the stock exchanges of Australia, Japan, Hong
Kong, New Zealand and Singapore. The Fund is neither sponsored by nor affiliated
with Morgan Stanley & Co. Incorporated. See "Investment Objectives and
Policies--Investment Policies Applicable to Prudential Pacific Index Fund" in
the Statement of Additional Information.
To achieve its investment objective, Prudential Pacific Index Fund will
purchase the equity securities that as a group reflect the price and yield
performance of the MSCI-Pacific Free Index. The Fund intends to invest in a
representative sample of the equity securities included in the MSCI-Pacific Free
Index in approximately the same proportions as they are represented in the
MSCI-Pacific Free Index. In addition, from time to time adjustments may be made
in the holdings of the Fund due to factors which may include changes in the
composition of the MSCI-Pacific Free Index. The MSCI-Pacific Free Index is
dominated by the Japanese stock market, which represented 78% of the market
capitalization of the Index as of September 30, 1998.
Prudential Pacific Index Fund intends to invest at least 80% of its total
assets in securities included in the MSCI-Pacific Free Index in the same
proportions as the Index. The Fund may invest the balance of its assets in: (i)
money market instruments; (ii) equity-related securities; (iii) put and call
options on securities, stock indices and foreign currencies; (iv) forward
foreign currency exchange contracts; and (v) financial futures contracts on
stocks and currencies and options thereon.
PRUDENTIAL SMALL-CAP INDEX FUND
Prudential Small-Cap Index Fund seeks 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 S&P 600
Index for that purpose. The S&P 600 Index is an unmanaged, market-value weighted
index (stock price times the number of shares outstanding) of 600 smaller
company U.S. common stocks that cover all industry sectors. Inclusion in the S&P
600 Index in no way implies an opinion by Standard & Poor's Corporation (S&P) as
to a stock's attractiveness as an investment. The S&P 600 Index currently
measures the performance of selected U.S. stocks with a market value of no
greater than $3.212 million (as of September 30, 1998). "S&P 600(R)," "Standard
& Poor's 600" and "600" 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. Prudential Small-Cap Index 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 Small-Cap Index Fund"
in the Statement of Additional Information regarding certain additional
disclaimers and limitations of liability on behalf of S&P.
To achieve its investment objective, Prudential Small-Cap Index Fund will
purchase equity securities that as a group reflect the price and yield
performance of the S&P 600 Index. The Fund intends to purchase a representative
sample of the 600 stocks included in the S&P 600 Index in approximately the same
proportions as they are represented in the S&P 600 Index. In addition, from time
to time adjustments may be made in the holdings of the Fund due to factors which
may include changes in the composition of the S&P 600 Index or receipt of
distributions of securities of companies spun off from S&P 600 companies.
Prudential Small-Cap Index Fund intends to invest at least 80% of its total
assets in securities included in the S&P 600 Index in the same proportions as
the Index. The Fund may invest the balance of its assets in: (i) equity-related
securities; (ii) money market instruments, including 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) stock index futures
contracts and options thereon.
14
<PAGE>
PRUDENTIAL STOCK INDEX FUND
Prudential Stock Index 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 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)", "S&P)", "S&P 500)",
"Standard & Poor's 500", and "500" are trademarks of McGraw-Hill, Inc. and have
been licensed for use by Prudential and its affiliates and subsidiaries.
Prudential Stock Index 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.
To achieve its investment objective, the Fund will purchase equity
securities that as a group reflect the price and yield performance of the S&P
500 Index. Prudential Stock Index 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.
Prudential Stock Index 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.
INVESTMENT POLICIES APPLICABLE TO EACH FUND
The Funds are each expected to invest in over 250 stocks (or bonds for the
Prudential Bond Market Index Fund). Stocks are selected for inclusion in each
applicable Fund's portfolio based on country, market capitalization, industry
weightings and fundamental characteristics such as return variability, earnings
valuation and yield. Each Fund's portfolio is constructed to have aggregate
investment characteristics similar to those of its respective index. In order to
parallel the performance of its respective index, Prudential Europe Index Fund
and Prudential Pacific Index Fund will invest in each country in approximately
the same percentage as the country's weight in the index.
The Funds may not hold all of the issues that comprise their respective
indices because of the costs involved and the illiquidity of many of the
securities. Instead, each Fund will attempt to hold a representative sample of
the securities in its respective index, which will be selected utilizing a
statistical technique known as "portfolio optimization." Under this technique,
each stock is considered for inclusion in the portfolio based on its
contribution to certain country, capitalization, industry and fundamental
investment characteristics. Each applicable Fund's portfolio is constructed so
that, in the aggregate, the country, capitalization, industry and fundamental
investment characteristics resemble those of its respective index. Over time,
portfolio composition is altered (or "rebalanced") to reflect changes in the
characteristics of the indices.
Due to the use of this sampling or "portfolio optimization" technique, the
Funds' portfolios (other than the portfolio of Prudential Stock Index Fund) are
not expected to track their benchmark indices with the same degree of accuracy
as large capitalization domestic index funds. Each Fund will attempt to achieve
a correlation between its performance and that of its respective index of at
least 0.95, in each case without taking into account expenses. A correlation of
1.00 would
15
<PAGE>
indicate perfect correlation, which would be achieved when a Fund's net asset
value, including the value of its dividends and capital gains distributions,
increases or decreases in exact proportion to changes in its respective index.
The investment adviser will, of course, attempt to minimize any tracking
differential (i.e., the statistical measure of the difference between the
investment results of a Fund and that of its respective 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 expenses, may cause a Fund's
return to be lower than the return of its respective index. Consequently, there
can be no assurance as to how closely a Fund's performance will correspond to
the performance of its respective index.
The Funds will not invest in money market instruments, futures contracts,
options or warrants as part of a temporary defensive strategy, such as reducing
a Fund's investments in common stocks to protect against potential stock market
declines. The Funds intend to remain fully invested, to the extent practicable,
in a pool of securities which will approximate the investment characteristics of
their respective indices. 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 a Fund's portfolio. Prudential Europe Index Fund
and Prudential Pacific Index Fund also may enter into foreign currency forward
contracts in order to maintain the same currency exposure as their respective
indices, but not as part of a defensive strategy to protect against fluctuations
in exchange rates.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement purposes, the Funds may also
(i) enter into repurchase agreements, when-issued, delayed delivery and forward
commitment transactions; and (ii) lend their portfolio securities.
EQUITY AND EQUITY-RELATED SECURITIES
EACH FUND OTHER THAN PRUDENTIAL BOND MARKET INDEX FUND INVESTS PRIMARILY IN
EQUITY SECURITIES, AND THE VALUE OF THESE FUNDS' INVESTMENTS WILL GO UP AND DOWN
WITH THE PERFORMANCE OF THE STOCKS IN THE APPLICABLE INDEX. INVESTMENT BY
PRUDENTIAL SMALL-CAP INDEX FUND IN SMALL COMPANIES INVOLVES GREATER RISK THAN IS
CUSTOMARILY ASSOCIATED WITH MORE ESTABLISHED COMPANIES. These companies often
have sales and earnings growth rates which exceed those of large companies;
however, smaller companies often have limited operating histories, product
lines, markets or financial resources, and may lack management depth. These
companies may be subject to intense competition from larger entities, and the
securities of these companies may have limited marketability and may be subject
to more abrupt or erratic movements in price than securities of larger companies
or the market averagesin general.
The Funds other than Prudential Bond Market Index Fund may invest in
equity-related securities. Equity-related securities include common stocks,
preferred stocks, securities convertible or exchangeable for common stocks or
preferred stocks, equity investments in partnerships, joint ventures, other
forms of non-corporate investments, American Depositary Receipts (ADRs),
American Depositary Shares (ADSs) and warrants and rights exercisable for equity
securities. See "Investment Objectives and Policies--Investment Policies
Applicable to Each of the Funds--Convertible Securities, Warrants and Rights" in
the Statement of Additional Information.
ADRs and ADSs are U.S. dollar-denominated certificates or shares 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
16
<PAGE>
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.
SECURITIES OF FOREIGN ISSUERS
PRUDENTIAL EUROPE INDEX FUND AND PRUDENTIAL PACIFIC INDEX FUND WILL INVEST
PRIMARILY IN EQUITY SECURITIES OF FOREIGN COMPANIES. PRUDENTIAL STOCK INDEX 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 THESE FUNDS. THESE RISKS
INCLUDE POLITICAL OR ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE
DIFFICULTY OF PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF
IMPOSITION OF EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. 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.
IF A 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 a Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although Prudential Europe Index
Fund and Prudential Pacific Index Fund will receive income in foreign
currencies, the two Funds will be required to compute and distribute their
income in U.S. dollars. Therefore, if the exchange rate for any such currency
declines after the Funds' income has been accrued and translated into U.S.
dollars, the Funds could be required to liquidate portfolio securities to make
such distributions, particularly in instances in which the amount of income the
Funds are required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time a 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. Prudential Europe
Index Fund and Prudential Pacific Index Fund may, but need not, enter into
futures contracts on foreign currencies, foreign currency forward
contracts and options on foreign currencies 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
interest or 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.
The Funds (other than Prudential Bond Market Index Fund) may invest a
portion of their assets in equity securities of foreign issuers denominated in
U.S. currency. ADRs and ADSs are not deemed to be foreign securities.
FIXED-INCOME OBLIGATIONS
Prudential Bond Market Index Fund will invest primarily in fixed-income
securities including U.S. Treasury obligations and securities issued or
guaranteed by U.S. Government agencies and instrumentalities, investment-grade
corporate debt obligations and mortgage-backed securities.
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U.S. Treasury securities, including bills, notes and bonds, are direct
obligations of the U.S. Government and, as such, are backed by the "full faith
and credit" of the United States. They differ primarily in their interest rates
and the lengths of their maturities. Obligations issued or guaranteed by
agencies of the U.S. Government or instrumentalities established or sponsored by
the U.S. Government may or may not be backed by the "full faith and credit" of
the United States.
The Fund may invest in debt securities of U.S. issuers that have securities
outstanding that are rated at the time of purchase at least BBB by Standard &
Poor's Ratings Group (S&P Ratings) or Baa by Moody's Investors Service (Moody's)
or comparably rated by a similar nationally recognized statistical rating
organization (NRSRO) or, if not rated, of comparable quality in the opinion of
the investment adviser. Securities rated Baa by Moody's are considered to be
investment grade, although they have speculative characteristics. Changes in
economic or other circumstances are more likely to lead to a weakened capacity
of issuers whose securities are rated BBB or Baa to pay interest or repay
principal than is the case for issuers of higher rated securities. See
"Description of Ratings" in the Statement of Additional Information.
Fixed-income securities are subject to interest rate risk and income risk.
Interest rate risk is the potential for fluctuations in bond prices due to
changing interest rates. Income risk is the potential for a decline in income
due to falling market interest rates. In addition, longer-term fixed-income
securities are subject to call risk, which is the possibility that corporate
bonds will be repaid prior to maturity.
Mortgage-backed securities represent undivided ownership interests in pools
of mortgages. The issuer guarantees the payment of interest on and principal of
these securities; however, the guarantees do not extend to the yield or value of
the securities. These securities are in most cases "pass-through" instruments,
through which the holders receive a share of all interest and principal payments
from the mortgages underlying the securities, net of certain fees. As a result
of the pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate.
MONEY MARKET INSTRUMENTS
The Funds 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 Funds may invest in money market
instruments without limit for temporary defensive purposes. To the extent the
Funds otherwise invest in money market instruments, they are subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
Each Fund may borrow up to 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. Each Fund may pledge up to 20% of its total assets to secure these
borrowings. If a Fund's asset coverage for borrowings falls below 300%, the Fund
will take prompt action to reduce its borrowings. If a Fund borrows to invest in
securities, any investment gains made on the securities in excess of interest
paid on the borrowing will cause the net asset value of the shares to rise
faster than would otherwise be the case. On the other hand, if the investment
performance of the additional securities purchased fails to cover their cost
(including any interest paid on the money borrowed) to the Fund, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. This is the speculative factor known as "leverage." See "Investment
Objectives and Policies--Investment Policies Applicable to Each of the
Funds--Borrowing" in the Statement of Additional Information.
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DOLLAR ROLLS
Prudential Bond Market Index Fund may use dollar rolls as part of its
investment strategy. The Fund may enter into dollar rolls in which the Fund
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale.
Dollar rolls involve the risk that the market value of the securities
retained by the Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. Dollar rolls are
speculative techniques involving leverage and are considered borrowings by the
Fund, which are limited to 20% of the Fund's total assets. The Fund may cover
dollar rolls by segregating with its custodian cash or liquid assets equal in
value to its obligations for dollar rolls. Covered rolls (i.e., those for which
there is an offsetting cash position or a cash equivalent security position) are
not considered borrowings for the purposes of the 20% limitation.
ILLIQUID SECURITIES
Each 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. A 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
Each Fund may 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. A
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 that has entered into the repurchase agreement
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. Each Fund may
participate in a joint repurchase account managed by PIFM pursuant to an order
of the Commission.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. The
Funds' Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Funds' purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities, the value may be more or less than the purchase price and an
increase in the percentage of a Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
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SECURITIES LENDING
Each Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable 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
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund that has loaned its
portfolio securities an amount equivalent to any dividend or interest paid on
such securities and that 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 extension 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, a Fund will not
lend more than 30% of the value of its total assets. A Fund may pay reasonable
administration and custodial fees in connection with a loan. See "Investment
Objectives and Policies--Investment Policies Applicable to Each of the
Funds--Securities Lending" in the Statement of Additional Information.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUNDS MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF THEIR INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. A FUND, AND THUS
ITS INVESTORS, 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. A 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, Dividends and Distributions" in
the Statement of Additional Information. New financial products and risk
management techniques continue to be developed, and each Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.
OPTIONS TRANSACTIONS
EACH 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
A FUND'S PORTFOLIO. Prudential Europe Index Fund and Prudential Pacific Index
Fund also may purchase and write put and call options on currencies. Each 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 (or currencies) it intends to purchase. Each
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.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITY, CURRENCY 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 a Fund writes a
call option, it gives up the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES 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. A Fund might, therefore, be obligated to purchase the underlying
securities or currency for more than the current market price.
EACH FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered
if, as long as a Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) segregates cash or other liquid
assets in an
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amount equal to or greater than its obligation under the option. Under the first
circumstance, a Fund's losses are limited because it owns the underlying
position; under the second circumstance, in the case of a written call option, a
Fund's losses are potentially unlimited. There is no limitation on the amount of
call options the Fund may write. 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.
Each 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.
Each 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, each 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, Dividends and Distributions" in the Statement of Additional
Information.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH 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 FUNDS,
AND THUS THEIR INVESTORS, 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. A Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
A 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 market value
of the Fund's total assets. A 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
requirements of the Commission and coverage requirements of the CFTC. If a 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 other
liquid assets in an amount at least equal to the Fund's obligations with respect
to such futures contract.
A 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 each Fund's ability to purchase or sell
certain futures contracts or related options on any particular day.
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RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH A FUND WOULD NOT BE SUBJECT ABSENT THE USE OF
THESE STRATEGIES. A FUND, AND THUS ITS INVESTORS, 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; (5) the
risk that the counterparty may be unable to complete the transaction and (6) the
possible inability of a 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 a
Fund to sell a portfolio security at a disadvantageous time, due to the need for
the Fund to maintain "cover" or to segregate liquid assets in connection with
hedging transactions. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.
Each 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; a
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 a
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by a 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
Each Fund is subject to certain investment restrictions which 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 of 1940, as amended
(Investment Company Act). See "Investment Restrictions" in the Statement of
Additional Information.
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HOW THE FUNDS ARE MANAGED
================================================================================
THE COMPANY HAS A BOARD OF TRUSTEES WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUNDS' MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON MATTERS
OF GENERAL POLICY. THE FUNDS' MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF EACH FUND. THE FUNDS' SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal period ended September 30, 1998, total expenses as a
percentage of net assets for Class Z shares of Prudential Bond Market Index
Fund, Prudential Europe Index Fund, Prudential Pacific Index Fund and Prudential
Small-Cap Index Fund were .40%, .60%, .60% and .50%, respectively, after the
Manager's expense reimbursement. For the fiscal year ended September 30, 1998,
total expenses as a percentage of net assets for Class Z and Class I shares of
Prudential Stock Index Fund were .40% and .30%, respectively, after the
Manager's expense reimbursement. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE COMPANY AND IS COMPENSATED FOR ITS SERVICES AT AN
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ANNUAL RATE OF .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF PRUDENTIAL BOND
MARKET INDEX FUND, .40 OF 1% OF THE AVERAGE DAILY NET ASSETS OF PRUDENTIAL
EUROPE INDEX FUND. .40 OF 1% OF THE AVERAGE DAILY NET ASSETS OF PRUDENTIAL
PACIFIC INDEX FUND, .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF PRUDENTIAL
SMALL-CAP INDEX FUND, AND .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
PRUDENTIAL STOCK INDEX FUND. PIFM is organized in New York as a limited
liability company . For the fiscal year ended September 30, 1998, the Funds paid
management fees to PIFM at the rates shown above. See "Manager and Subadviser"
in the Statement of Additional Information.
As of October 31, 1998, PIFM served as the manager to 67 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies, with aggregate
assets of approximately $68.2 billion.
Under the Management Agreements with the Company, PIFM manages the
investment operations of the Funds and also administers the Company's business
affairs. See "Manager and Subadviser" in the Statement of Additional
Information.
SUBADVISER
THE PRUDENTIAL INVESTMENT CORPORATION (PIC), GATEWAY CENTER TWO, 4TH FLOOR,
NEWARK, NEW JERSEY 07102-1084, SERVES AS SUBADVISER TO EACH FUND.
PURSUANT TO SUBADVISORY AGREEMENTS 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 THE
SUBADVISER.
Under each Subadvisory Agreement, the Subadviser, subject to the
supervision of PIFM, is responsible for managing the assets of each Fund in
accordance with its investment objective, investment program and policies. The
Subadviser determines what securities and other instruments are purchased and
sold for each Fund and is responsible for obtaining and evaluating financial
data relevant to each Fund.
Prudential Investments is responsible for the day-to-day management of the
Funds, employing a team approach to the management of these Funds.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE SHARES OF EACH FUND. IT IS A WHOLLY-OWNED SUBSIDIARY
OF PRUDENTIAL. Prudential Securities Incorporated (Prudential Securities), One
Seaport Plaza, New York, New York 10292 previously served as the distributor of
the Funds' shares. It is an indirect, wholly-owned subsidiary of Prudential.
UNDER A DISTRIBUTION AGREEMENT, THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING EACH FUND'S SHARES, NONE OF WHICH IS REIMBURSED BY OR PAID FOR BY
THE FUNDS. These expenses include commissions and account servicing fees paid
to, or on account of, Dealers or financial institutions which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
the Distributor associated with the sale of each Fund's shares, including lease,
utility, communications and sales promotion expenses.
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The Manager (or one of its affiliates) may make payments from its own
resources Dealers and other persons which distribute shares of the Funds. Such
payments may be calculated by reference to the NAV of shares sold by such
persons or otherwise.
FEE WAIVERS AND SUBSIDY
PIFM has agreed to subsidize the operating expenses of Prudential Bond
Market Index Fund, Prudential Europe Index Fund, Prudential Pacific Index Fund
and Prudential Small-Cap Index Fund so that total Fund operating expenses do not
exceed .40%, .60%, .60% and .50%, respectively, of each Fund's average net
assets and .40% and .30% for Class Z and Class I shares of Prudential Stock
Index Fund, 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 a Fund. This voluntary subsidy may be terminated at any time without
notice. Fee waivers and expense subsidies will increase a Fund's total return.
See "Performance Information" in the Statement of Additional Information and
"Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Funds provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for each 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. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Funds. PMFS is a
wholly owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Funds and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities, trades, payments of
interest and dividends, pricing and account services. Although at this time,
there can be no assurance that there will be no adverse impact on the Funds, the
Manager, the Distributor and the Custodian have advised the Fund that they have
been actively working on necessary changes to their computer systems to prepare
for the year 2000 and expect that their systems, and those of outside service
providers, will be adapted in time for that event.
Additionally, issuers of securities generally as well as those purchased by
the Funds may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held by
the Funds.
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HOW EACH FUND VALUES ITS SHARES
================================================================================
A 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 EACH 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. For valuation purposes, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
Each 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.
================================================================================
HOW EACH FUND CALCULATES PERFORMANCE
================================================================================
FROM TIME TO TIME A FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
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 a 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 a 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. A 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
Information" in the Statement of Additional Information. Further performance
information will be contained in each 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
EACH FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUNDS WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON THEIR NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT THEY DISTRIBUTE TO THEIR SHAREHOLDERS.
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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 each 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, Dividends and Distributions" 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.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to shareholders whether or not reinvested. Any net capital gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses) distributed to shareholders will be taxable as long-term capital gains
to the shareholders, whether or not reinvested and regardless of the length of
time a shareholder has owned his or her shares. The maximum federal long-term
capital gains rate for individual shareholders for securities held more than one
year is 20% and the maximum statutory federal income tax rate for ordinary
income is 39.6%. The maximum statutory federal long-term capital gains rate and
the maximum statutory federal tax rate for ordinary income for corporate
shareholders currently is 35%. Both regular and capital gains dividends are
taxable to shareholders in the year in which received, whether they are received
in cash or in additional shares. In addition, certain dividends declared by the
Fund will be treated as received by shareholders on December 31 of the year the
dividends are declared. This rule applies to dividends declared by the Fund in
October, November or December of a calendar year, payable to shareholders of
record on a date in any such month, if such dividends are paid during January of
the following calendar year.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent a Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts and income from some
other certain sources will not be eligible for the corporate dividends-received
deduction. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption of a Fund's shares by a
shareholder who is not a dealer in securities will be treated as a long-term
capital gain or loss if the shares have been held more than one year and
otherwise as a short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. With respect to non-corporate shareholders, gain or loss on
shares held more than one year will be considered in determining a holder's
adjusted net capital gain subject to a maximum statutory tax rate of 20%.
WITHHOLDING TAXES
Under U.S. Treasury regulations, each Fund is required to withhold and
remit to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable on the accounts of certain shareholders who fail to furnish
their
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correct tax identification numbers to the IRS on IRS Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital gains
distributions (but not redemption proceeds) payable to shareholders who are
otherwise subject to backup withholding. Dividends of net investment income and
short-term gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
EACH 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 EACH 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.
A Fund will notify each shareholder after the close of the Fund's taxable year
both of the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF A FUND.
================================================================================
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 FIVE SERIES OR
PORTFOLIOS: PRUDENTIAL BOND MARKET INDEX FUND, PRUDENTIAL EUROPE INDEX FUND,
PRUDENTIAL PACIFIC INDEX FUND, PRUDENTIAL SMALL-CAP INDEX FUND AND PRUDENTIAL
STOCK INDEX FUND. Each Fund offers one class of shares, except for Prudential
Stock Index Fund, which offers two 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.
The Company's expenses generally are allocated among the Funds on the basis
of relative net assets at the time of allocation, except that expenses directly
attributable to a particular Fund or class of a Fund are charged to that Fund or
class. Shares of a 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.
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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 Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
================================================================================
SHAREHOLDER GUIDE
================================================================================
HOW TO BUY SHARES OF A FUND
YOU MAY PURCHASE SHARES OF A FUND THROUGH THE DISTRIBUTOR, THROUGH DEALERS,
INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE FUND, THROUGH
ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE TRANSFER
AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW
JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS SPONSORED BY PRUDENTIAL RETIREMENT
SERVICES SHOULD CONTACT THEIR CLIENT REPRESENTATIVE FOR MORE INFORMATION ABOUT
PURCHASING SHARES OF THE FUND. The purchase price is the NAV next determined
following receipt of an order in proper form (in accordance with procedures
established by the Transfer Agent in connection with investors' accounts) by the
Distributor, your Dealer or the Transfer Agent. Payment may be made by wire,
check or through your brokerage account. See "How Each Fund Values its Shares."
There is no minimum or subsequent investment requirement for shares of the
Funds. See "Shareholder Services."
Application forms can be obtained from the Transfer Agent or the
Distributor. If a share certificate is desired, it must be requested in writing
for each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive share
certificates.
The Funds reserve the right to reject any purchase order (including an
exchange into a Fund) or to suspend or modify the continuous offering of their
shares. See "How to Sell Your Shares."
Your Dealer is responsible for forwarding payment promptly to the
applicable Fund. The Distributor reserves the right to cancel any purchase order
for which payment has not been received by the third business day following the
placement of the order
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in Fund shares may be subject to
postage and handling charges imposed by your Dealer. Any such charges are
retained by the Dealer and are not remitted to the Fund.
ELIGIBLE PURCHASERS
Class Z shares of each 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", "Prudential Retirement Programs" and "PruArray Association Benefit
Plans" below, (ii) participants in any fee-based program or trust program
sponsored by an affiliate of the Distributor which includes mutual funds as
investment options and for which the Fund is an available option, (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by an affiliate of the Distributor for whom Class Z shares of the Prudential
Mutual Funds are an available investment option, (iv) Benefit Plans (as defined
below) for which an affiliate of the Distributor provides administrative or
recordkeeping services 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
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Prudential Mutual Funds, (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund), (vi) employees of Prudential or
Prudential Securities who participate in a Prudential-sponsored employee savings
plan and (vii) Prudential with an investment of $10 million or more.
Class I shares of Prudential Stock Index Fund are available for purchase by
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 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.
PURCHASE BY WIRE. For an initial purchase of shares of a Fund by wire, you
must complete an application and 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, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Index Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the Fund and the
applicable class if purchasing shares of Prudential Stock Index Fund.
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the applicable Fund as of that day. See "Net Asset Value" in
the Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Index Series
Fund, the Fund whose shares you are purchasing, 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. Prudential Stock Index 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.
RIGHTS OF ACCUMULATION. Shares of each 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 each 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 Prudential,
Prudential Securities or its subsidiaries (Prudential Securities 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. Class Z shares of each Fund may be
purchased by certain savings, retirement and deferred compensation plans,
qualified or non-qualified under the Internal Revenue Code, for which Prudential
provides administrative or recordkeeping services, provided that (i) the plan
has at least $1 million in existing assets or 250 eligible employees and (ii)
the Fund is an available investment option. These plans include pension,
profit-sharing,
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stock bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation plans and annuity plans under Sections 457
or 403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All plans of a company (or affiliated companies under common
control) for which Prudential provides administrative or recordkeeping services
are aggregated in meeting the $1 million threshold, provided that Prudential has
been notified in advance of the entitlement to the waiver of the sales charge
based on aggregated assets. The term "existing assets" as used herein includes
stock issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray Plan
(Participating Funds). "Existing assets" also include monies invested in The
Guaranteed Investment Account (GIA), a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential, and units of The Stable Value Fund (SVF), an unaffiliated
bank collective fund. Shares of each 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 Plan provided that the Association enters into a written agreement with
Prudential. Such Benefit Plans or non-qualified plans may purchase shares of a
Fund without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plan(s) so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at least
$50 million (for Prudential Stock Index Fund, the retirement plan assets must
aggregate at least $1 million or have at least 250 participants) and (ii)
maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class Z shares of each 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 Transfer Agent and (ii)
spouses of employees who open an IRA account with the Transfer Agent. The
program is offered to companies that have at least 250 eligible employees.
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 or otherwise.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF A FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM (IN
ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION WITH
INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR, OR YOUR DEALER. See
"How Each Fund Values its Shares." If you are redeeming your shares through a
Dealer, your Dealer must receive your sell order before the Fund computes its
NAV for that day (i.e., 4:15 P.M., New York time) in order to receive that day's
NAV. Your Dealer will be responsible for furnishing all necessary documentation
to the Distributor and may charge you for its services in connection with
redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR, OR
YOUR DEALER IN ORDER FOR THE REDEMPTION 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 whose shares you are redeeming
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in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010, the
Distributor or your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray Plan, if the proceeds of the redemption are
invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD
SHARES THROUGH A DEALER, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR ACCOUNT AT YOUR DEALER, UNLESS YOU INDICATE OTHERWISE. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by a Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for a Fund fairly to
determine the value of its net assets, or (d) during any other period when the
Commission, by order, so permits; provided that applicable rules and regulations
of the Commission shall govern as to whether the conditions prescribed in (b),
(c) or(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL A
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE
PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING
SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of a Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as a regular redemption. See "How Each 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 a Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund
during a 90-day period for any one shareholder.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF A 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. SHAREHOLDERS HAVE THE ABILITY TO EXCHANGE THEIR
CLASS Z SHARES OF A 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 AT NAV HAVE THE ABILITY TO EXCHANGE THEIR SHARES OF A
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 PRUDENTIAL
STOCK INDEX 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
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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
Company 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 FUNDS NOR THEIR AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after the
request is received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Participants in Prudential Securities' 401(k)
plan for which the Funds' Class Z shares are an available option and who wish to
transfer their Class Z shares out of the Prudential Securities 401(k) Plan
following separation from service (i.e., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at the NAV of other Prudential Mutual Funds.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Funds and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Funds reserve the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect each Fund and its shareholders from
excessive trading, each Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in a 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 Funds 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
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distributions sent in cash rather than reinvested. If you hold shares through
your Dealer, 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 available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from your Dealer or the Transfer
Agent. If you are considering adopting such a plan, you should consult with your
own legal or tax adviser with respect to the establishment and maintenance of
such a plan.
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 THE PRUTECTOR PROGRAM OPTIONAL GROUP TERM LIFE INSURANCE. Prudential
makes available optional group term life insurance coverage to purchasers of
shares of certain Prudential Mutual Funds which are held in an eligible
brokerage account. This insurance protects the value of your mutual fund
investment for your beneficiaries against market downturns. The insurance
benefit is based on the difference at the time of the insured's death between
the "protected value" and the then current market value of the shares. This
coverage is not available in all states and is subject to various restrictions
and limitations. For more complete information about this program, including
charges and expenses, please contact your Prudential representative.
o REPORTS TO SHAREHOLDERS. The Funds 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, each 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, 100 Mulberry Street, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data are available upon request from each
Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Funds at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A. at
(732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
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34
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the 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.
The Prudential High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
---------------------
TAX-EXEMPT BOND FUNDS
---------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
------------
GLOBAL FUNDS
------------
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
------------
EQUITY FUNDS
------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
------------------
MONEY MARKET FUNDS
------------------
o Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
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>
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 Funds' Risk Factors and
Special Characteristics? ................................... 2
FUND EXPENSES ................................................. 5
FINANCIAL HIGHLIGHTS .......................................... 6
HOW THE FUNDS INVEST .......................................... 12
Investment Objectives and Policies ........................... 12
Other Investments and Policies ............................... 18
Hedging and Return Enhancement Strategies .................... 20
Investment Restrictions ...................................... 22
HOW THE FUNDS ARE MANAGED ..................................... 22
Manager ...................................................... 22
Subadviser ................................................... 23
Distributor .................................................. 23
Fee Waivers and Subsidy ...................................... 24
Portfolio Transactions ....................................... 24
Custodian and Transfer and ................................... 24
Dividend Disbursing Agent ................................... 24
Year 2000 Readiness Disclosure .............................. 24
HOW EACH FUND VALUES ITS SHARES ............................... 25
HOW EACH FUND CALCULATES PERFORMANCE .......................... 25
TAXES, DIVIDENDS AND DISTRIBUTIONS ............................ 25
GENERAL INFORMATION 27
Description of Shares ........................................ 27
Additional Information ....................................... 28
SHAREHOLDER GUIDE ............................................. 28
How to Buy Shares of a Fund .................................. 28
How to Sell Your Shares ...................................... 30
How to Exchange Your Shares .................................. 31
Shareholder Services.......................................... 32
THE PRUDENTIAL MUTUAL FUND FAMILY ............................. A-1
================================================================================
MF177A
- --------------------------------------------------------------------------------
CUSIP Nos.: Prudential Bond Market Index Fund
Class Z: 74431F-83-7
Prudential Europe Index Fund
Class Z: 74431F-81-1
Prudential Pacific Index Fund
Class Z: 74431F-82-9
Prudential Small-Cap Index Fund
Class Z: 74431F-84-5
Prudential Stock Index Fund
Class Z: 74431-20-9
Class I: 74431-86-0
- -------------------------------------------------------------------------------
PRUDENTIAL
BOND MARKET
INDEX FUND
PRUDENTIAL
EUROPE
INDEX FUND
PRUDENTIAL
PACIFIC
INDEX FUND
PRUDENTIAL
SMALL-CAP
INDEX FUND
PRUDENTIAL
STOCK
INDEX FUND
P R O S P E C T U S
NOVEMBER 30, 1998
www.prudential.com
PRUDENTIAL INVESTMENTS
[LOGO]
<PAGE>
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
Statement of Additional Information
dated November 30, 1998
Prudential Bond Market Index Fund, Prudential Europe Index Fund, Prudential
Pacific Index Fund, Prudential Small-Cap Index Fund and Prudential Stock Index
Fund (each a Fund and collectively, the Funds) are each a series of Prudential
Index Series Fund (the Company).
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 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.
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 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 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.
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, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Prudential Stock Index Fund dated
November 30, 1998, and the Prospectus of Prudential Bond Market Index Fund,
Prudential Europe Index Fund, Prudential Pacific Index Fund, Prudential
Small-Cap Index Fund and Prudential Stock Index Fund dated November 30, 1998,
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-13
Trustees and Officers .................................................. B-14
Manager and Subadviser ................................................. B-18
Distributor ............................................................ B-20
Portfolio Transactions and Brokerage ................................... B-20
Purchase and Redemption of Fund Shares ................................. B-22
Shareholder Investment Account ......................................... B-23
Net Asset Value ........................................................ B-25
Taxes, Dividends and Distributions ..................................... B-26
Performance Information ................................................ B-29
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants .............................................. B-31
Financial Statements ................................................... B-32
Report of Independent Accountants--Prudential Bond Market Index Fund.... B-41
Report of Independent Accountants--Prudential Europe Index Fund......... B-57
Report of Independent Accountants--Prudential Pacific Index Fund ....... B-71
Report of Independent Accountants--Prudential Small-Cap Index Fund...... B-88
Report of Independent Accountants--Prudential Stock Index Fund ......... B-104
Appendix--Description of Ratings ....................................... A-1
Appendix I--General Investment Information ............................. I-1
Appendix II--Historical Performance Data ............................... II-1
Appendix III--Information Relating to Prudential ....................... III-1
MF174B
<PAGE>
GENERAL INFORMATION
The Company changed its name from The Prudential Institutional Fund to
Prudential Dryden Fund effective October 30, 1996. In addition, 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 Bond Market Index Fund, Prudential Europe Index Fund,
Prudential Pacific Index Fund and Prudential Small-Cap Index Fund. The Company
changed its name from Prudential Dryden Fund to Prudential Index Series Fund
effective January 23, 1998.
INVESTMENT OBJECTIVES AND POLICIES
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 Index Fund does hold
unhedged 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 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
B-2
<PAGE>
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 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
unhedged 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 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 Free Index (MSCI-Pacific Free 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 unhedged 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 Free Index.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley &
Co. Incorporated.
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 unhedged 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 STANDARD & POOR'S
CORPORATION (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 PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (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 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
B-3
<PAGE>
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 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 unhedged
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 THE
MANAGER AND ITS AFFILIATES IS THE LICENSING OF CERTAIN TRADEMARKS AND TRADE
NAMES OF S&P AND OF THE S&P 500 INDEX WHICH IS DETERMINED, COMPOSED AND
CALCULATED BY S&P WITHOUT REGARD TO THE MANAGER OR THE FUND. S&P HAS NO
OBLIGATION TO TAKE THE NEEDS OF THE MANAGER OR THE SHAREHOLDERS INTO
CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE S&P 500 INDEX. S&P IS
NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES
AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE OR SALE OF THE SHARES OF
THE FUND. S&P HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE
ADMINISTRATION, MARKETING OR TRADING OF THE FUND.
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 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.
B-4
<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 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
Each Fund has the authority to enter into reverse repurchase agreements,
dollar rolls and forward rolls, but no Fund plans to do so for the foreseeable
future; the Funds 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.
FIXED-INCOME SECURITIES
In general, the ratings of Moody's Investors Service (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
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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 the Subadviser's discretion, to
take advantage of investment opportunities, when yields on available investments
exceed interest rates and other expenses of related borrowing, or when, in the
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
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forward rolls, dollar rolls or reverse repurchase agreements, although no Fund
currently has any intention of doing so other than Prudential Bond Market Index
Fund. Prudential Bond Market Index Fund may use dollar rolls as described in the
Prospectus.
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
segregated 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 counterparty. In
addition, with OTC options, there is a risk that the counterparty 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.
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 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
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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 the 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
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
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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 segregate cash or
securities.
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
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 a Fund generally arising in connection with the purchase or sale of
its securities and accruals of interest or dividends receivable and Fund
expenses. Position hedging is the sale of a foreign currency with respect to
security positions denominated or quoted in that currency. A Fund may not
position hedge with respect to a particular currency for an amount greater than
the aggregate market value (determined at the time of making any sale of a
forward contract) of securities, denominated or quoted in, or currently
convertible into, such currency. A forward contract generally has no deposit
requirements, and no commissions are charged for such trades.
A Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when 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 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
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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 counterparty 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 counterparty. 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 counterparty, 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 segregate cash or other liquid assets in an amount
equal to the position. A Fund's ability to enter into foreign currency forward
contracts may be limited by certain requirements for qualification as a
regulated investment company under the Internal Revenue Code. See "Taxes,
Dividends and Distributions."
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 foreign currency forward 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 the 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.
FOREIGN CURRENCY STRATEGIES--SPECIAL CONSIDERATIONS
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.
A 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 Subadviser believes will have a positive
correlation to
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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, a 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 the
Securities and Exchange Commission (Commission) guidelines regarding cover for
these instruments and, if the guidelines so require, segregate cash or liquid
assets with its Custodian in the prescribed amount.
Assets used as cover or segregated 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 a Fund's assets to cover or segregation could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
SEGREGATED ASSETS
Each Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), 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 Commission guidelines, these will not be deemed to be senior
securities. The assets segregated 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
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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 Subadviser will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, the Subadviser 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 unrated, be of comparable quality in the view of the
investment adviser, and (ii) it must not be "traded flat" (i.e., without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The staff of the Commission has taken the position that purchased 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
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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 of 1940, as amended (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 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 de emed to be an underwriter
under certain federal securities laws. The Fund has no limit with respect to
investments in restricted securities.
B-13
<PAGE>
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.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ ------------- -----------------------
<S> <C> <C>
Edward D. Beach (73) Trustee President and Director of BMC Fund, Inc.,
a closed-end investment company; formerly, Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield
Income Fund, Inc.
Delayne Dedrick Gold (59) Trustee Marketing and Management Consultant; Director of The High
Yield Income Fund, Inc.
* Robert F. Gunia (51) Vice President Vice President (since September 1997) of Prudential; Executive Vice
and Trustee President and Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM); Senior Vice
President (since March 1987) of Prudential Securities
Incorporated (Prudential Securities); formerly Chief
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.
Douglas H. McCorkindale (58) Trustee Vice Chairman (since March 1984) and President (since September
1997) of Gannett Co. Inc. (publishing and media); Director
of Gannett Co. Inc., Frontier Corporation and Continental
Airlines, Inc.
* Mendel A. Melzer, CFA (38) Trustee Chief Investment Officer (since October 1996) of Prudential
751 Broad St. Mutual Funds; formerly Chief Financial Officer (November
Newark, NJ 07102 1995-September 1996) of Prudential Investments, Senior Vice
President and Chief Financial Officer (April 1993-November
1995) of Prudential Preferred Financial Services, Managing
Director (April 1991-April 1993) of Prudential Investment
Advisors and Senior Vice President (July 1989-April 1991) of
Prudential Capital Corporation; Chairman and Director of
Prudential Series Fund, Inc.; Director of The High Yield Income
Fund, Inc.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ ------------- ----------------------
<S> <C> <C>
Thomas T. Mooney (56) 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, The Business Council of New York State,
Monroe County Water Authority, Rochester Jobs, Inc., Executive Service
Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast Midwest Institute
and The High Yield Income Fund, Inc.; President,
Director and Treasurer of First Financial Fund, Inc.
and The High Yield Plus Fund, Inc.
Stephen P. Munn (55) Trustee Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988-December 1993)
of Carlisle Companies Incorporated (manufacturer
of industrial products).
* Richard A. Redeker (54) Trustee Employee of Prudential Investments; formerly President, Chief
751 Broad St. Executive Officer and Director (October 1993-September 1996),
Newark, NJ 07102 Prudential Mutual Fund Management, Inc., Executive Vice
President, Director and Member of 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-September 1993);
President and Director of The High Yield Income Fund, Inc.
Robin B. Smith (58) Trustee Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1988-August 1996) and President
and Chief Operating Officer (September 1981-December 1988)
of Publishers Clearing House; Director of BellSouth
Corporation, Texaco Inc., Spring Industries Inc. and Kmart
Corporation.
* Brian M. Storms (44) President and President (since October 1998) of Prudential Investments;
Trustee President (September 1996-October 1998) of Prudential Mutual
Funds, Annuities and Investment Management Services;
Managing Director (July 1991-September 1996) of Fidelity
Investment Institutional Services Company, Inc.; President
(October 1989-September 1991) of J.K. Schofield; Senior Vice
President (September 1982-October 1989) of INVEST Financial
Corporation.
B-15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
------------------------ ------------- -----------------------
<S> <C> <C>
Louis A Weil, III (57) Trustee Publisher and Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central Newspapers,
Inc.; Chairman of the Board (since January 1996), Publisher
and Chief Executive Officer (August 1991-December 1995) of
Phoenix Newspapers, Inc.; formerly Publisher (May 1989-March
1991) of Time Magazine, President, Publisher & CEO (February
1986-August 1989) of The Detroit News and member of the
Advisory Board, Chase Manhattan Bank-Westchester; Director
of The High Yield Income Fund, Inc.
Clay T. Whitehead (59) Trustee President, National Exchange Inc. (new business
development firm) (since May 1983).
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of PIFM; First
Principal Vice President (since March 1993) of Prudential Securities;
Financial and formerly 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.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential Investments;
Treasurer formerly First Vice President (February 1993-September 1996)
of Prudential Mutual Fund Management, Inc.
Marguerite E.H. Morrison (42) Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel (since September 1987) of Prudential
Securities; formerly Vice President and Associate General Counsel
(June 1991-September 1996) of Prudential Mutual Fund Management, Inc.
</TABLE>
- ----------------
(1) Unless otherwise stated, the address of the Trustees and Officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, 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 Investment Management Services LLC.
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 Subadviser" and "Distributor," review such actions and decide on
general policy.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Trustees who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
Pursuant to the terms of each Management Agreement with the Funds, the
Manager pays all compensation of officers and employees of the Funds as well as
the fees and expenses of all Trustees of the Funds who are affiliated persons of
the
B-16
<PAGE>
Manager. The Company currently pays each of its Trustees who is not an
affiliated person of PIFM or the investment adviser annual compensation of
$4,000 in addition to certain out-of-pocket expenses. The amount of annual
compensation paid to each Trustee may change as a result of the introduction of
additional funds on whose boards the Trustee may 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 Commission 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,
1998 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, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION OR TOTAL 1997
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 $3,750 None N/A $135,000(38/63)*
Delayne D. Gold--Trustee $3,750 None N/A 135,000(38/63)*
Robert F. Gunia--Trustee+ -- None N/A None
Donald D. Lennox--Former Trustee $ 750 None N/A 90,000(26/50)*
Douglas H. McCorkindale--Trustee++ $3,750 None N/A 70,000(20/35)*
Mendel A. Melzer--Trustee+ -- None N/A None
Thomas T. Mooney--Trustee++ $3,750 None N/A 115,000(31/64)*
Stephen P. Munn--Trustee $3,750 None N/A 45,000(15/21)*
Richard A. Redeker--Trustee+ -- None N/A None
Robin B. Smith--Trustee++ $3,750 None N/A 90,000(27/34)*
Louis A. Weil, III--Trustee $3,750 None N/A 90,000(26/50)*
Clay T. Whitehead--Trustee $3,750 None N/A 45,000(15/21)*
</TABLE>
- ---------------
* Indicates number of Funds/portfolios in Fund Complex to which aggregate
compensation relates.
+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
interested Trustees, do not receive compensation from the Company or any
fund in the Fund Complex.
++ Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1997, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,640,
$143,909 and $139,097 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
As of November 13, 1998, the Trustees and officers of the Company, as a
group, owned less than 1% of the outstanding shares of each Fund.
As of November 13, 1998, there were no beneficial owners, directly or
indirectly, of more than 5% of any class of Shares of the Funds in the Company.
B-17
<PAGE>
As of November 13, 1998, Prudential Securities was the record holder for
the beneficial owners of 536,669 shares of Prudential Bond Market Index Fund
(approximately 14.8% of outstanding shares of such Fund); 209,167 shares of
Prudential Europe Index Fund (approximately 12.1% of outstanding shares of such
Fund); 48,234 shares of Prudential Pacific Index Fund (approximately 1.8% of
outstanding shares of such Fund); 850,740 shares of Prudential Small-Cap Index
Fund (approximately 31% of outstanding shares of such Fund) and 1,894,983 shares
of Prudential Stock Index Fund (approximately 15.2% of outstanding shares of
such Fund). In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy material to the beneficial
owners for which it is the record holder.
MANAGER AND SUBADVISER
The manager of the Company is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC) (PIFM or the Manager), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PIFM serves as
manager to all of the other investment companies that, together with the Funds,
comprise the Prudential Mutual Funds. See "How the Funds are Managed--Manager"
in the Prospectus. As of October 31, 1998, PIFM managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $68.2 billion. According to the Investment Company Institute, as
of October 31, 1998, the Prudential Mutual Funds were the 18th largest family of
mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to two Management Agreements with the Company (each a 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 .25 of 1% of Prudential Bond Market Index Fund's
average daily net assets, .40 of 1% of Prudential Europe Index Fund's average
daily net assets, .40 of 1% of Prudential Pacific Index Fund's average daily net
assets, .30 of 1% of Prudential Small-Cap Index Fund's average daily net assets
and .30 of 1% of Prudential Stock 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 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' Subadviser;
B-18
<PAGE>
(ii) all expenses incurred by the Manager or by the Company in
connection with managing the ordinary course of the Company's business,
other than those assumed by the Company as described below; and
(iii) the costs and expenses or fees payable to The Prudential
Investment Corporation, doing business as Prudential Investments (PI, the
investment adviser or the Subadviser), pursuant to two subadvisory
agreements between the Manager and the Subadviser (collectively, the
Subadvisory Agreements).
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 Commission,
including the preparation and printing of the Company's registration statements
and prospectuses for such purposes, and paying the fees and expenses of notice
filings made in accordance with state securities laws, (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 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 14, 1998 and by the shareholders of Prudential Stock Index Fund on
October 30, 1996. The Management Agreement for Prudential Bond Market Index
Fund, Prudential Europe Index Fund, Prudential Pacific Index Fund and Prudential
Small-Cap 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 14, 1998.
Prudential Institutional Fund Management, Inc., the manager of Prudential
Stock Index Fund until October 30, 1996, received for the period from September
30, 1996 through October 30, 1996, and for the fiscal year ended September 30,
1996, the following management fees from the Fund, expressed both as a dollar
amount and as a percentage of the Fund's average daily net assets: $64,568
(.40%), $570,160 (.40%), respectively. For the period from October 30, 1996
through September 30, 1997, PIFM received the following management fee,
expressed as both a dollar amount and as an annualized percentage of the Fund's
average daily net assets: $921,557 (.30%). During this period the Manager
subsidized certain expenses of the Fund. See "How the Fund is Managed--Fee
Waivers and Subsidy" in the Prudential Stock Index Fund Prospectus.
For the fiscal period ended September 30, 1997, PIFM received management
fees of $1,630 from Prudential Pacific Index Fund.
B-19
<PAGE>
For the fiscal period ended September 30, 1998, PIFM received management
fees of $83,862 from Prudential Bond Market Index Fund, $70,719 from Prudential
Europe Index Fund, $79,309 from Prudential Pacific Index Fund, $67,841 from
Prudential Small-Cap Index Fund, and $2,457,979 from Prudential Stock Index
Fund.
The Manager has entered into two Subadvisory Agreements with the
Subadviser. The Subadvisory Agreements provide that the Subadviser furnish
investment advisory services in connection with the management of the Funds. The
Subadviser is reimbursed by the Manager for the reasonable costs and expenses
incurred in furnishing its services. In connection therewith, the Subadviser is
obligated to keep certain books and records of the Funds. The Manager continues
to have responsibility for all investment advisory services to all the Funds
pursuant to the Management Agreements and supervises the Subadviser's
performance of such services.
The Subadvisory Agreement for Prudential Stock Index Fund was last approved
by the Trustees, including a majority of the Trustees who are not parties to the
Subadvisory Agreement or interested persons of any such party as defined in the
Investment Company Act, on May 14, 1998, and by the shareholders of the Fund on
October 30, 1996. The Subadvisory Agreement for Prudential Bond Market Index
Fund, Prudential Europe Index Fund, Prudential Pacific Index Fund and Prudential
Small-Cap Index Fund was last approved by the Trustees, including a majority of
the Trustees who are not parties to the Subadvisory Agreement or interested
persons of any such party as defined in the Investment Company Act, on May
14, 1998.
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 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.
DISTRIBUTOR
Prudential Investment Management Services LLC (the Distributor), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the Class Z shares of Prudential Bond Market Index Fund,
Prudential Europe Index Fund, Prudential Pacific Index Fund and Prudential
Small-Cap Index Fund, and the Class Z and Class I shares of Prudential Stock
Index Fund. Prior to June 1, 1998, Prudential Securities Incorporated
(Prudential Securities) was the Fund's distributor.
The Distributor of the Funds 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 Funds are Managed--Distributor" in the
Prospectus.
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, Dividends and Distributions."
B-20
<PAGE>
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 the Subadviser, investments of the type that the
Funds may make also may be made for those other accounts. When the Fund and one
or more other accounts managed by the 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 include 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, the 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
Subadviser is 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 Subadviser, subject to seeking best price and execution, is
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
Subadviser must regard such higher commissions as reasonable in relation to the
brokerage and research services provided, viewed in terms of the Subadviser's
responsibilities to the Fund or other accounts, if any, as to which it exercises
investment discretion. The fees under the Management Agreements and the
Subadvisory Agreements, respectively, are not reduced by reason of the
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 Prudential
Securities 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 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 Prudential Securities also are
subject to such fiduciary standards as may be imposed by applicable law.
The Funds may use Prudential Securities 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 the
Subadviser, the affiliated broker-dealer charges the Fund a fair and reasonable
rate. This standard would allow Prudential Securities 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.
B-21
<PAGE>
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 Subadviser 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 Prudential Securities is a member, except to the extent
permitted by SEC rules.
During the years ended September 30, 1998, 1997 and 1996, the Company paid
no brokerage commissions to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Funds are offered to a limited group of investors at net
asset value (NAV) without any sales charges. See "Shareholder Guide--How to Buy
Shares of the Fund" in the Prospectus of Prudential Stock Index Fund and
"Shareholder Guide--How to Buy Shares of a Fund" in the Prospectus of Prudential
Bond Market Index Fund, Prudential Europe Index Fund, Prudential Pacific Index
Fund, Prudential Small-Cap Index Fund and Prudential Stock Index Fund.
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."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the applicable Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Company and the
Distributor, Class Z and Class I shares are sold at NAV. Using the NAV of each
Fund at September 30, 1998, the maximum offering price of each Fund's shares is
as follows:
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
BOND MARKET EUROPE PACIFIC SMALL-CAP STOCK
INDEX FUND INDEX FUND INDEX FUND INDEX FUND INDEX FUND
----------- ---------- ---------- ---------- ----------
CLASS Z
<S> <C> <C> <C> <C> <C>
Net asset value, redemption price
and offering price per Class Z share...... $10.91 $10.64 $6.38 $8.09 $23.11
CLASS I
Net asset value, redemption price
and offering price per Class I share...... N/A N/A N/A N/A $23.13
</TABLE>
B-22
<PAGE>
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 NAV 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 NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent.
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 the relative NAV next determined after receipt of an order in
proper form. An exchange will be treated as a redemption and purchase for tax
purposes. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS Z. Class Z 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.
CLASS I. Class I shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your Dealer.
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.
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)
B-23
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 Investment Plan."
</TABLE>
AUTOMATIC INVESTMENT PLAN (ASAP)
Under AIP, 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
brokerage account (including a Prudential Securities 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Distributor, your Dealer 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.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and Distributions."
The Distributor and the Transfer Agent act as agents for the shareholder in
redeeming sufficient full and fractional shares to provide the amount of the
periodic withdrawal payment. The systematic withdrawal plan may be terminated at
any time, and the Distributor reserves the right to initiate a fee of up to $5
per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. 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 the Distributor or the Transfer Agent.
B-24
<PAGE>
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 a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
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 financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
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 by the Manager in consultation with the Subadviser to
be over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent or 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
B-25
<PAGE>
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 Manager or
Subadviser (or Valuation Committee or Board of Trustees), does not represent
fair value, are valued by the Valuation Committee or Board of Trustees in
consultation with the Manager or the Subadviser, including its Portfolio
Manager, traders, and its research and credit analysts on the basis of the
following factors: cost of the security, transactions in comparable securities,
relationships among various securities and 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 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, DIVIDENDS AND DISTRIBUTIONS
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.
B-26
<PAGE>
TAX CONSEQUENCES TO THE FUNDS
Each Fund intends to elect to qualify and intends to remain qualified as a
regulated investment company (RIC) under subchapter M of the Internal Revenue
Code. This would relieve each Fund but not its shareholders from paying federal
income tax with on income and capital gains which 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 (a) derive at least 90% of its annual gross income, without reduction for
losses from the sale or other disposition of securities, 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 but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such securities or
currencies (Income Requirement) and (b) 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 assets is represented by cash, U.S. Government securities 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 of such issuer, 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).
DISTRIBUTION REQUIREMENT. Each Fund must distribute (or be deemed to have
distributed) 90% or more of its net investment income and net short-term gains
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 foregoing tax and interest, the Fund
might be required to include in income each year a pro rata 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. Alternatively, a Fund may make a "mark-to-market"
election with respect to any marketable stock it holds of a PFIC. If the
election is in effect, at the end of the Fund's taxable year, the Fund will
recognize the amount of gains, if any, with respect to PFIC stock. No loss will
be recognized on PFIC stock, except to the extent of gains recognized in prior
years. 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 forward foreign currency
exchange contracts or 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.
B-27
<PAGE>
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.
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.
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.
Any loss realized on a sale, redemption or exchange of shares of a Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
B-28
<PAGE>
PERFORMANCE 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
A Fund may from time to time advertise its average annual total return.
Average annual total return is determined separately for Class Z and Class I
shares. See "How the Fund Calculates Performance" or "How Each Fund Calculates
Performance" in the Prospectus.
A Fund's "average annual total return" is computed according to a formula
prescribed by the SEC, expressed as follows:
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 of Prudential Stock
Index Fund for the one year and five years ended September 30, 1998 and from
commencement of operations (November 5, 1992) through September 30, 1998 was
8.61%, 19.29% and 18.33%, respectively. The average annual total return for
Class I shares of Prudential Stock Index Fund from the commencement of
operations (August 1, 1997) through September 30, 1998 and the year ended
September 30, 1998 was 7.42% and 8.69%, respectively. The average annual total
return for the Class Z shares of Prudential Pacific Index Fund from commencement
of operations (September 24, 1997) through September 30, 1998 and for the one
year ended September 30, 1998 was (35.87)% and (35.54)%, respectively. The
average annual total return (unannualized) from the commencement of operations
(October 1, 1997) through September 30, 1998 for Prudential Bond Market Index
Fund, Prudential Europe Index Fund and Prudential Small-Cap Index Fund was
10.79%, 7.17% and (18.98)%, respectively.
AGGREGATE TOTAL RETURN
A Fund may also advertise its aggregate total return. Aggregate total
return is determined separately for Class Z and Class I shares. See "How Each
Fund Calculates Performance" in the 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 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
B-29
<PAGE>
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
ended September 30, 1998 and the period from commencement of operations
(September 24, 1997) through September 30, 1998 for Class Z shares of Prudential
Pacific Index Fund was (35.54)% and (36.32)%, respectively. The aggregate total
returns for the one year, five years and since inception periods ended September
30, 1998 for Prudential Stock Index Fund's Class Z shares were 8.61%, 141.54%
and 169.88%, respectively . The aggregate total return for Class I shares of
Prudential Stock Index Fund for the one year ended September 30, 1998 and the
period from commencement of operations (August 1, 1997) through September 30,
1998 was 8.69%, and 8.69%, respectively. The aggregate total return since
inception (October 1, 1997) through September 30, 1998 for Prudential Bond
Market Index Fund, Prudential Europe Index Fund and Prudential Small-Cap Index
Fund was 10.79%, 7.17% and (18.98)%, respectively.
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)
A LOOK AT PERFORMANCE OVER THE LONG TERM
1/1/26 - 12/31/97
----------------------------------------
Common Stock ..................... 11.0%
Long Term Government Bonds ....... 5.2%
Inflation ........................ 3.1%
- -------------
(1) Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1998
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-30
<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 (PMFS), 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, a new account set-up fee for each manually established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including, but not limited to,
postage, stationery, printing, allocable communications expenses and other
costs. For the fiscal year ended September 30, 1998, the Company incurred fees
of approximately $601,100 for the services of PMFS.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, currently serves as the Company's independent accountants and in that
capacity audits the Funds' annual financial statements.
B-31
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--94.4%
- ------------------------------------------------------------------------------------------------------------------------------
Domestic Corporate Bonds--16.6%
Finance--6.2%
Bankamerica Corp. Aa3 7.20% 4/15/06 $ 330 $ 359,578
Chase Manhattan Corp. A1 7.125 3/01/05 250 265,958
Chemical Bank Aa3 7.00 6/01/05 180 191,232
Citicorp A1 7.625 5/01/05 300 330,201
Donaldson, Lufkin & Jenrette, Inc. A3 6.50 6/01/08 350 348,477
First Union Corp. A2 6.40 4/01/08 200 210,720
Goldman Sachs Group A1 6.625 12/01/04 360 374,400
Merrill Lynch and Co., Inc. Aa3 6.50 4/01/01 60 61,556
Spieker Properties LP Baa2 6.65 12/15/00 325 328,705
-----------
2,470,827
- ------------------------------------------------------------------------------------------------------------------------------
Industrials--7.1%
Cox Communications, Inc. Baa2 6.80 8/01/28 115 119,992
Ford Motor Co. A1 9.98 2/15/47 220 317,814
General Motors Corp. A2 7.70 4/15/16 500 561,050
Lockheed Martin Corp. A3 7.70 6/15/08 210 239,014
News America Holdings, Inc. Baa3 9.25 2/01/13 200 245,004
Northrop Grumman Corp. Baa3 8.625 10/15/04 200 227,022
Penney (J.C.) & Co. A2 9.05 3/01/01 250 271,460
Rockwell International Corp. Aa3 6.625 6/01/05 450 480,240
TCI Communications, Inc. Baa3 8.75 8/01/15 100 124,928
Time Warner, Inc. Baa3 9.125 1/15/13 200 251,138
-----------
2,837,662
- ------------------------------------------------------------------------------------------------------------------------------
Utilities--3.3%
Carolina Power & Light Co. A2 6.80 8/15/07 70 77,300
GTE Corp. Baa1 6.36 4/15/06 350 372,785
Pacificorp A2 6.375 5/15/08 300 313,449
Worldcom, Inc. Baa2 6.40 8/15/05 500 527,610
-----------
1,291,144
-----------
Total domestic corporate bonds (cost $6,345,726) 6,599,633
- ------------------------------------------------------------------------------------------------------------------------------
Asset Backed Securities--2.1%
Credit Card Receivables Trust, Series 1998-1 Aaa 6.478 12/22/04 291 295,752
World Financial Network Credit Card Master Trust, Series
1996 B, Class A Aaa 6.95 4/15/06 500 532,500
-----------
Total asset backed securities (cost $804,199) 828,252
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-32
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations--2.3%
American Housing Trust, Series VI, Class 1-I Aaa 9.15% 5/25/20 $ 166 $ 178,992
Lb Commercial Conduit Mortgage Trust, Series 1998 C1,
Class A3 Aaa 6.48 1/18/08 300 318,375
Shurgard Securities Trust, Series 1, Class 1 AA(b) 8.24 6/15/01 380 407,669
-----------
Total collateralized mortgage obligations (cost $883,553) 905,036
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage Backed Securities--27.2%
Federal Home Loan Mortgage Corp. 6.50 11/01/27 247 251,331
Federal Home Loan Mortgage Corp. 6.50 12/01/27 587 598,100
Federal Home Loan Mortgage Corp. 6.50 12/01/27 97 99,224
Federal Home Loan Mortgage Corp.(a) 7.00 11/12/28 1,000 1,026,560
Federal Home Loan Mortgage Corp.(a) 8.00 11/12/28 1,000 1,035,620
Federal National Mortgage Assoc. 9.50 7/01/25 324 347,749
Federal National Mortgage Assoc.(a) 6.50 10/14/28 1,000 1,016,870
Federal National Mortgage Assoc.(a) 6.50 10/19/28 500 510,465
Federal National Mortgage Assoc.(a) 7.50 10/19/28 1,000 1,029,680
Federal National Mortgage Assoc.(a) 7.50 11/12/28 2,500 2,578,900
Government National Mortgage Assoc. 8.49 1/15/19 260 283,287
Government National Mortgage Assoc.(a) 6.50 11/18/28 1,000 1,022,180
Government National Mortgage Assoc.(a) 7.50 11/18/28 1,000 1,036,560
-----------
Total mortgage backed securities (cost $10,785,171) 10,836,526
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Obligations--4.1%
Federal National Mortgage Assoc. 7.40 7/01/04 600 675,564
Federal National Mortgage Assoc. 6.72 8/01/05 200 221,374
Small Business Administration 6.55 12/01/17 683 731,158
-----------
Total U.S. government agency obligations (cost
$1,538,870) 1,628,096
- ------------------------------------------------------------------------------------------------------------------------------
U. S. Government Obligations(c)--39.1%
United States Treasury Bond 11.875 11/15/03 450 601,592
United States Treasury Bond 12.00 8/15/13 500 782,110
United States Treasury Bond 7.50 11/15/16 750 954,727
United States Treasury Bond 8.125 8/15/19 400 547,936
United States Treasury Bond 7.875 2/15/21 1,060 1,430,332
United States Treasury Bond 8.125 8/15/21 100 138,672
United States Treasury Bond 7.125 2/15/23 400 504,936
United States Treasury Bond 6.375 8/15/27 120 141,713
United States Treasury Bond 6.125 11/15/27 1,015 1,170,102
United States Treasury Note 5.375 1/31/00 445 449,726
United States Treasury Note 7.75 1/31/00 2,000 2,081,880
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-33
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
U. S. Government Obligations(c) (cont'd.)
United States Treasury Note 6.00% 8/15/00 $ 1,400 $ 1,439,816
United States Treasury Note 6.25 8/31/00 750 775,432
United States Treasury Note 5.75 11/15/00 200 205,468
United States Treasury Note 6.25 1/31/02 2,300 2,431,882
United States Treasury Note 5.75 10/31/02 200 210,218
United States Treasury Note 5.50 1/31/03 625 653,025
United States Treasury Note 6.50 8/15/05 450 505,827
United States Treasury Note 5.625 5/15/08 500 546,875
-----------
Total U. S. government obligations (cost $14,647,865) 15,572,269
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Corporate Bonds--1.6%
Hanson PLC (United Kingdom) A3 7.375 1/15/03 300 322,461
Tyco International Group (Luxembourg) Baa1 6.375 6/15/05 300 316,218
-----------
Total foreign corporate bonds (cost $609,699) 638,679
-----------
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Government Obligations--1.4%
Quebec Hydro (Canada)
(cost $525,213) A2 7.50 4/10/06 559,140
-----------
Total long-term investments (cost $36,140,296) 37,567,631
-----------
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--29.0%
Repurchase Agreement--28.0%
Joint Repurchase Agreement Account (Note 5) NR 5.522 10/01/98 11,152 11,152,000
U.S. Government Obligations--1.0%
United States Treasury Note 6.00 8/15/99 375 379,279
-----------
Total short-term investments (cost $11,527,795) 11,531,279
-----------
Total Investments--123.4%
(cost $47,668,091; Note 4) 49,098,910
Liabilities in excess of other assets--(23.4)% (9,309,302)
-----------
Net Assets--100% $39,789,608
-----------
-----------
</TABLE>
- ---------------
LP--Limited Partnership.
NR--Not rated by Moody's or Standard & Poor's.
PLC--Public Limited Company (British Corporation).
(a) Mortgage dollar roll, see Note 1.
(b) Standard & Poor's Rating.
(c) Pledged as collateral for dollor rolls.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Statement of Assets and Liabilities PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1998
------------------
<S> <C>
Investments excluding repurchase agreement, at value (cost $36,516,091)................................ $ 37,946,910
Repurchase Agreement, at value (cost $11,152,000)...................................................... $ 11,152,000
Cash................................................................................................... 170
Receivable for investments sold........................................................................ 8,333,340
Interest receivable.................................................................................... 428,254
Receivable for Fund shares sold........................................................................ 80,589
Due from Manager....................................................................................... 26,951
Prepaid expenses....................................................................................... 387
------------------
Total assets........................................................................................ 57,968,601
------------------
Liabilities
Dollar roll payable.................................................................................... 9,262,878
Payable for investments purchased...................................................................... 8,838,417
Accrued expenses and other liabilities................................................................. 53,609
Payable for Fund shares reacquired..................................................................... 24,089
------------------
Total liabilities................................................................................... 18,178,993
------------------
Net Assets............................................................................................. $ 39,789,608
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 3,646
Paid-in capital in excess of par.................................................................... 36,690,630
------------------
36,694,276
Undistributed net investment income.................................................................... 1,462,703
Accumulated net realized gain on investments........................................................... 201,810
Net unrealized appreciation on investments............................................................. 1,430,819
------------------
Net assets, September 30, 1998......................................................................... $ 39,789,608
------------------
------------------
Class Z:
Net asset value per share
($39,789,608 / 3,646,071 shares of beneficial interest issued and outstanding)................... $10.91
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35
<PAGE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Through
Net Investment Income September 30, 1998
<S> <C>
Income
Interest............................... $2,038,989
------------------
Expenses
Management fee......................... 83,862
Custodian's fees and expenses.......... 82,000
Registration fees...................... 72,000
Reports to shareholders................ 20,000
Legal fees............................. 20,000
Audit fee.............................. 18,000
Trustees' fees......................... 6,400
Transfer agent's fees and expenses..... 2,000
Miscellaneous.......................... 804
------------------
Total operating expenses............ 305,066
Less: Expense subsidy (Note 2)......... (170,875)
------------------
Net expenses........................ 134,191
------------------
Net investment income.................... 1,904,798
------------------
Realized and Unrealized Gain on
Investments
Net realized gain on investment
transactions........................... 220,276
Net change in unrealized appreciation
investments............................ 1,430,819
------------------
Net gain on investments.................. 1,651,095
------------------
Net Increase in Net Assets
Resulting from Operations................ $3,555,893
------------------
------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Increase in Through
Net Assets September 30, 1998
<S> <C>
Operations
Net investment income.................... $ 1,904,798
Net realized gain on investment
transactions.......................... 220,276
Net change in unrealized appreciation on
investments........................... 1,430,819
------------------
Net increase in net assets resulting from
operations............................ 3,555,893
------------------
Dividends and distributions (Note 1)
Dividends from net investment income..... (461,718)
------------------
Distributions from net realized gains.... (18,466)
------------------
Fund share transactions
Net proceeds from shares sold............ 38,076,778
Net asset value of shares issued in
reinvestment of distributions......... 469,351
Cost of shares reacquired................ (1,832,230)
------------------
Net increase in net assets from Fund
share transactions.................... 36,713,899
------------------
Total increase............................. 39,789,608
Net Assets
Beginning of period........................ 0
------------------
End of period(b)........................... $ 39,789,608
------------------
------------------
- ---------------
(a) Commencement of operations.
(b) Includes undistributed net investment
income of............................ $ 1,462,703
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
Prudential Index Series 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 five separate funds. Prudential Bond Market Index Fund
(the 'Fund') commenced investment operations on October 1, 1997 when 3,000,020
shares of beneficial interest of the Fund were sold for $30,000,200 to the
Prudential Insurance Company of America ('The Prudential').
The Fund's investment objective is to seek to provide investment results that
correspond to the total return performance of a broad-based index of
fixed-income securities, currently the Lehman Brothers Aggregate Bond Index.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Company and the Fund in the preparation of its financial statements.
Security Valuation: 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 were no sales on such day, at the mean between the last bid price in
the absence of an asked price. Securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued by an independent pricing
agent or a principal market maker. U.S. Government securities for which market
quotations are available are valued at a price provided by an independent
broker/dealer or pricing service.
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 were no sales
on the applicable option exchange, on such day at the average of the quoted bid
and asked prices as of the close of such exchange. 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 the quoted bid and asked prices as of the close of
such exchange or board of trade. 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 that, in the judgement of the subadviser,
does not represent fair value, are valued at fair value as determined by
procedures established by the Company's Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Company's policy that its custodian or designated
subcustodians, under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
equal to its obligations, in respect of dollar rolls.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses from investment
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund accretes discounts and amortizes
premiums on portfolio securities as adjustments to interest income. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income and distributions of net realized 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.
- --------------------------------------------------------------------------------
B-37
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
Taxes: For federal income tax purposes, each fund in the Company is treated as a
separate taxpaying entity. It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net investment income to its shareholders.
Therefore, no federal income tax provision is required.
Deferred Offering Expenses: Approximately $20,000 of expenses were incurred in
connection with the organization of the Fund. These costs were deferred and
amortized over a period of one year from the date the Fund commenced investment
operations.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with American Institute of Certified
Public Accountants' Statement of Position 93-2: Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect of applying this statement was
to increase undistributed net investment income and decrease paid-in capital by
$19,623 due to certain expenses not deductible for tax purposes. Net investment
income, net realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Company has a management agreement with Prudential Investments Fund
Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for
all investment advisory services and supervises the subadviser's performance of
such services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Company. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Company, occupancy
and certain clerical and bookkeeping costs of the Company. The Company bears all
other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .25 of 1% of the Fund's average daily net assets.
The Company had a distribution agreement with Prudential Securities Incorporated
('PSI') which acted as the distributor of the Company through May 31, 1998.
Prudential Investment Management Services LLC ('PIMS') became the Company's
distributor effective June 1, 1998 and is serving the Company under the same
terms and conditions as under the arrangement with PSI. No distribution or
service fees are paid to PIMS as distributor of the Fund.
PSI, PIFM, PIC and PIMS are indirect wholly owned subsidiaries of The Prudential
Insurance Company of America.
PIFM has agreed to subsidize the operating expenses of the Fund, so that total
Fund operating expenses do not exceed .40% on an annualized basis of the Fund's
average daily net assets. This voluntary waiver may be terminated at any time
without notice. For the period ended September 30, 1998, PIFM subsidized
$170,875 of the expenses of the Fund (0.51% of the average daily net assets
annualized or $0.047 per share).
The Company, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement during the period
ended September 30, 1998. The Fund pays a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds. The Agreement
expires on December 29, 1998.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Company's transfer agent. During the period ended September 30,
1998, the Fund incurred fees of approximately $1,800 for the services of PMFS.
As of September 30, 1998, approximately $300 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended September 30, 1998, were $28,705,632 and $10,569,626,
respectively, which includes purchases and sales of U.S. government obligations
of $16,880,613 and $4,995,544, respectively.
The federal income tax basis of the Fund's investments at September 30, 1998 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $1,430,819 (gross
unrealized appreciation-$1,435,414; gross unrealized depreciation-$4,595).
- --------------------------------------------------------------------------------
B-38
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
The average balance of dollar rolls outstanding during the period ended
September 30, 1998 was approximately $7,441,249. The value of dollar rolls
outstanding at September 30, 1998 was $9,256,835, which was 16% of total assets.
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Company, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of September
30, 1998, the Fund had a 1.51% undivided interest in the repurchase agreements
in the joint account. This undivided interest represented $11,152,000 in
principal amount. As of such date, the repurchase agreements in the joint
account and the value of the collateral therefore were as follows:
Warburg Dillon Read LLC, 5.52%, in the principal amount of $210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the collateral
including accrued interest was $214,255,819.
Bear Stearns & Co., 5.58%, in the principal amount of $210,000,000, repurchase
price $210,032,550, due 10/1/98. The value of the collateral including accrued
interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
Goldman Sachs, & Co., 5.45%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 10/1/98. The value of the collateral including accrued
interest was $214,200,293.
- ------------------------------------------------------------
Note 6. Capital
The Fund has authorized an unlimited number of shares of Class Z beneficial
interest at $.001 per value per share. Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
Class Z Shares
- -------------------------------------------------- ---------
<S> <C>
October 1, 1997(a) through
September 30, 1998:
Shares sold....................................... 3,776,725
Shares issued in reinvestment of dividends and
distributions................................... 46,470
Shares reacquired................................. (177,124)
---------
Net increase in shares outstanding................ 3,646,071
At September 30, 1998, 3,091,847 shares were owned by The
Prudential.
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
B-39
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Financial Highlights PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(c)
Through
September 30,
1998
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................................................................... $ 10.00
------
Income from investment operations
Net investment income(d).................................................................................. .55
Net realized and unrealized gain on investment transactions............................................... .52
------
Total from investment operations....................................................................... 1.07
------
Less distributions
Dividends from net investment income...................................................................... (.15)
Distribution from net realized gains...................................................................... (.01)
------
Total dividends and distributions...................................................................... (.16)
------
Net asset value, end of period............................................................................ $ 10.91
------
------
TOTAL RETURN(a):.......................................................................................... 10.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................................................................... $ 39,790
Average net assets (000).................................................................................. $ 33,637
Ratios to average net assets:(d)
Expenses............................................................................................... .40%(b)
Net investment income.................................................................................. 5.68%(b)
Portfolio turnover rate................................................................................ 33%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
(c) Commencement of investment operations.
(d) Net of expense subsidy.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Report of Independent Accountants PRUDENTIAL BOND MARKET INDEX FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Index Series Fund--Prudential Bond Market Index Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Index Series
Fund--Prudential Bond Market Index Fund (the 'Fund,' one of the portfolios
constituting Prudential Index Series Fund) at September 30, 1998, and the
results of its operations, the changes in its net assets and the financial
highlights for the period October 1, 1997 (commencement of operations) through
September 30, 1998, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
- --------------------------------------------------------------------------------
B-41
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.6%
COMMON STOCKS--96.9%
- ------------------------------------------------------------
Austria--0.5%
100 Austrian Airlines $ 3,104
482 Bank Austria AG 20,658
50 Boehler-Uddeholm AG 2,169
25 EA-Generali AG 4,784
80 Flughafen Wien AG 3,262
150 Oesterreichische
Electrizitaetswirtschafts AG,
Ser. A 23,834
130 OMV AG 11,642
65 Va Technologie AG 5,892
35 Wienerberger Baustoffindustrie AG 6,756
------------
82,101
- ------------------------------------------------------------
Belgium--2.6%
20 D'Ieteren SA 8,988
44 Barco Industries N.V. 10,333
6 Bekaert N.V. 3,227
68 Cimenteries CBR Cementbedrijven 5,235
12 Colruyt N.V. 9,559
30 Compaignie Maritime Belge SA 1,757
197 Delhaize-Le Lion SA 14,879
229 Electrabel SA 90,299
330 Fortis AG NPV 81,328
147 Fortis AG Strip VVPR 9
147 Fortis AG CVG 1,240
20 Glaverbel SA 2,407
86 Groupe Bruxelles Lambert SA 14,313
1,172 KBC Bankverzekerin 75,777
40 KBC Bankverzekerin 2
100 PetroFina SA 36,677
340 Solvay SA 22,673
320 Tractebel 51,957
6 Ucb SA 30,635
78 Union Miniere SA 3,040
------------
464,335
Denmark--1.3%
30 Bang & Olufsen Holding A/S $ 2,030
129 Carlsberg A/S, Ser. A 7,503
94 Carlsberg A/S, Ser. B 5,769
5 D/S 1912, Ser. B 32,651
4 D/S Svendborg, Ser. B 37,136
235 Danisco A/S 15,901
206 Den Danske Bank Group 23,339
170 FLS Industries A/S, Ser. B 3,585
60 International Service Systems A/S 3,163
300 Novo Nordisk A/S, Ser. B 36,113
521 Tele Danmark A/S 51,731
212 Unidanmark A/S 15,345
------------
234,266
- ------------------------------------------------------------
Finland--1.5%
180 Cultor Oyj, Ser. 1 1,804
40 Instrumentarium Group, Ser. A 1,667
500 Kemira Oyj 3,292
350 Kesko Oyj 4,608
50 Kone Corp., Ser. B 5,011
3,200 Merita plc, Ser. A 16,350
150 Metra Oyj, Ser. B 2,918
1,840 Nokia Oyj, Ser. A 147,891
700 Nokia Oyj, Ser. K 55,506
500 Outokumpu Oyj, Ser. A 4,147
80 Pohjola Insurance Group, Ser. A 3,144
200 Sampo Insurance Co. Ltd., Ser. A 5,699
1,050 UPM-Kymmene Oyj 23,936
------------
275,973
- ------------------------------------------------------------
France--12.5%
140 Accor SA 29,350
660 Alcatel Alsthom SA 58,643
1,410 Axa-UAP 129,055
670 Banqe Paribas 36,101
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
France (cont'd.)
913 Banque Nationale de Paris $ 48,869
100 Bouygues SA 18,109
130 Canal Plus 31,568
270 Cap Gemini SA 41,332
155 Carrefour SA 98,202
50 Club Mediterranee SA 3,720
400 Compagnie de Saint Gobain 53,026
50 Compagnie Francaise d'Etudes et de
Construction Technip 4,121
660 Compagnie General des Eaux 131,416
20 Compagnie Generale de Geophysique SA 1,178
550 Compagnie Generale des Etablissements
Michelin, Ser. B 21,589
22 Comptoirs Modernes 13,738
300 Danone 78,843
350 Dassault Systemes SA 13,239
1,110 Elf Aquitaine SA 136,849
100 Eridania Beghin-Say SA 18,680
30 Essilor International SA 11,026
280 Etablissements Economiques du
Casino Guichard-Perrachon SA 28,226
3,290 France Telecom SA 194,589
50 Groupe GTM 4,460
50 Imetal SA 4,639
396 L'Air Liquide 62,740
275 L'OREAL 127,815
400 Lafarge SA 35,398
450 Lagardere S.C.A. 12,838
110 Legrand SA 27,967
360 Louis Vuitton Moet Hennessy 49,136
30 Pathe SA 5,620
230 Pechiney 7,953
200 Pernod Ricard 14,720
475 Pinault-Printemps-Redoute SA 68,647
50 Primagaz Cie 4,255
80 Promodes 48,730
200 PSA Peugeot Citroen 34,114
1,490 Rhone-Poulenc SA, Ser. A 62,473
10 Sagem SA 6,316
450 Sanofi SA 66,158
610 Schneider SA 31,780
50 SEB SA $ 3,886
100 SEITA 5,781
100 Sidel SA 6,851
50 Simco SA 3,898
200 Societe Bic SA 11,137
10 Societe Eurafrance SA 4,874
400 Societe Generale 44,248
120 Sodexho Alliance 20,875
600 Suez Lyonnaise des Eaux 102,127
610 Thomson CSF 18,611
990 Total SA, Ser. B 124,704
20 Unibail SA 2,801
950 Usinor SA 10,560
303 Valeo SA 21,624
------------
2,259,205
- ------------------------------------------------------------
Germany--14.0%
160 Adidas-Salomon AG 18,332
150 AGIV AG 3,500
975 Allianz AG 302,180
150 AMB Aachener & Muenchener
Beteiligungs AG 23,065
100 Axa Colonia Konzern AG 11,129
2,500 BASF AG 94,684
2,950 Bayer AG 111,374
1,620 Bayerische Vereinsbank AG 119,221
300 Beiersdorf AG, Ser. A 16,693
100 Bilfinger & Berger Bau AG 1,926
10 Buderus AG 4,365
500 Continental AG 11,936
2,300 Daimler-Benz AG 192,383
350 Degussa AG 14,973
2,130 Deutsche Bank AG 109,982
1,410 Deutsche Lufthansa AG 27,848
8,730 Deutsche Telekom 271,090
60 Douglas Holding AG 3,454
6 Douglas Holding AG NPV 348
1,990 Dresdner Bank AG 74,058
200 Fag Kugelfischer Georg Schaefer AG 2,010
200 Heidelberger Zement AG 13,223
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Germany (cont'd.)
250 Hochtief AG $ 7,180
30 Karstadt AG 14,683
50 Linde AG 29,168
50 MAN AG 16,095
1,530 Mannesmann AG 140,060
650 Merck KGaA 26,251
950 Metro AG 66,105
320 Muenchener Rueckversicherungs-
Gesellschaft AG 141,107
12 Muenchener Ruckversicherungs-
Gesellschaft AG (Registered) 5,277
60 Preussag AG 20,732
1,840 RWE AG 85,375
240 SAP AG 101,666
270 Schering AG 27,907
50 SGL Carbon AG 3,425
2,290 Siemens AG 126,464
150 Thyssen AG 25,569
1,990 VEBA AG 103,587
105 Viag AG 72,121
1,220 Volkswagen AG 87,958
------------
2,528,504
- ------------------------------------------------------------
Ireland--0.6%
500 Ryanair Holdings plc 3,288
4,000 Allied Irish Banks plc 58,584
1,350 CRH plc 17,049
200 DCC plc 1,151
1,000 Fyffes plc 1,719
600 Greencore Group plc 2,197
1,000 Independent Newspapers plc 3,587
1,250 Irish Life plc 9,247
300 Irish Permanent plc 3,654
3,900 Jefferson Smurfit Group plc 5,829
600 Kerry Group plc, Ser. A 6,994
800 Tullow Oil plc 956
------------
114,255
Italy--6.3%
4,044 Assicurazioni Generali $ 131,419
7,000 Banca Commerciale Italiana 42,044
7,400 Banca Intesa SpA 31,124
2,000 Banca Intesa SpA (Nonconvertible) 4,115
1,000 Banca Popolare di Milano 7,201
6,000 Benetton Group SpA 9,041
1,000 Bulgari SpA 4,720
500 Burgo (Cartiere) SpA 2,802
11,500 Credito Italiano 47,880
2,500 Edison SpA 19,002
31,900 ENI SpA 195,363
500 Falck Acciaierie & Ferriere Lombarde 3,645
16,100 Fiat SpA 41,116
3,500 Fiat SpA (Nonconvertible) 5,708
3,100 Istituto Bancario San Paolo diTorino 38,927
2,500 Istituto Mobilare Italiano SpA 32,981
15,000 Istituto Nazionale delle
Assicurazioni (INA) 38,125
500 Italcementi SpA 3,752
3,000 Italgas (Soc Ital) SpA 12,872
500 La Rinascente SpA 4,381
2,800 Magneti Marelli 3,889
140 Marzotto(Gaetano) & Figlia SpA 1,360
4,500 Mediaset SpA 30,160
2,400 Mediobanca SpA 22,076
500 Mondadori (Arnoldo) Editore SpA 5,807
19,000 Montedison SpA 18,144
10,500 Olivetti Group SpA 22,144
5,500 Parmalat Finanziaria SpA 8,105
7,700 Pirelli SpA 20,410
1,500 Riunione Adriatica di Sicurta SpA 15,790
500 Riunione Adriatica di Sicurta SpA
(Nonconvertible) 3,934
1,000 Sirti SpA 4,841
2,000 Snia BPD SpA 2,548
500 Societa Assicuratrice
Industriale(SAI) 4,841
6,000 Telecom Italia Mobile SpA (di Risp) 19,280
27,000 Telecom Italia Mobile SpA 157,185
3,500 Telecom Italia SpA (di Risp) 16,722
15,000 Telecom Italia SpA 103,256
------------
1,136,710
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Netherlands--7.5%
5,525 ABN AMRO Holding N.V. $ 94,082
1,130 Akzo Nobel N.V. 40,163
101 ASR Verzekerings Groep N.V. 7,581
2,632 Elsevier N.V. 39,095
312 Getronics N.V. 14,151
1,206 Heineken N.V. 58,218
100 Hollandsche Beton Groep N.V. 1,226
93 IHC Caland N.V. 4,342
3,741 ING Groep N.V. 168,487
269 KLM Royal Dutch Airlines N.V. 6,778
2,286 Koninklijke Ahold N.V. 68,274
121 Koninklijke Hoogovens N.V. 3,389
1,874 Koninklijke KPN BT 57,858
107 Koninklijke Pakhoed Holdings N.V. 2,412
308 Oce N.V. 10,375
8,650 Royal Dutch Petroleum Co. 429,041
1,483 Royal Philips Electronics N.V. 79,851
100 Stork N.V. 2,302
1,819 TNT Post Group N.V. 46,318
2,570 Unilever N.V. 161,692
254 Wolters Kluwer N.V. 48,736
------------
1,344,371
- ------------------------------------------------------------
Norway--0.6%
200 Aker RGI ASA 2,513
200 Bergesen dy ASA, Ser. A 2,837
100 Bergesen dy ASA, Ser. B 1,324
2,300 Christiania Bank Og Kreditkasse 7,209
2,600 Den Norske Bank ASA 8,149
100 Dyno Industrier ASA 1,419
200 Elkem ASA 2,216
150 Kvaerner ASA, Ser. A 1,905
120 Leif Hoegh & Co. ASA 1,540
350 Merkantildata ASA 2,672
700 NCL Holdings ASA 1,560
1,150 Norsk Hydro ASA 41,871
100 Norske Skogindustrier ASA, Ser. A 2,513
600 Orkla ASA, Ser. A 8,106
160 Orkla ASA, Ser. B 1,902
200 Petroleum Geo Services 3,269
140 Sas Norge ASA 1,419
200 Schibsted ASA $ 2,486
80 Smedvig ASA 735
1,100 Storebrand ASA, Ser. A 7,579
100 Tomra Systems ASA 2,121
------------
105,345
- ------------------------------------------------------------
Portugal--0.9%
878 Banco Comercial Portugues SA 23,687
520 Banco Espirito Santo e Comercial de
Lisboa 14,244
300 BPI-SGPS SA 8,265
220 Brisa-Auto Estradas de Portugal SA 10,016
350 Cimpor-Cimentos de Portugal, SGPS SA 9,750
50 Companhia de Seguros Tranquilidade 1,451
2,400 EDP-Electricadade de Portugal SA 55,165
300 Jeronimo Martins, SGPS SA 10,152
350 Portucel Industrial-Empresa Produtora
de Celulose SA 2,030
750 Portugal Telecom SA 27,268
170 Sonae Investimentos-Sociedade
Gestorade Participacoes Sociais SA 4,956
100 Unicer-Uniao Cervejeira 2,192
------------
169,176
- ------------------------------------------------------------
Spain--4.3%
200 Acerinox SA 3,843
119 Acs Actividades Co 3,376
967 Autopistas del Sol SA 14,771
218 Azucarera Ebro Agricolas 5,187
8,340 Banco Bilbao Vizcaya SA 89,232
4,713 Banco Central Hispanoamericano 43,625
4,686 Banco Santander SA 72,402
54 Coporacion Financiera Alba SA 6,507
2,028 Corporacion Bancaria de Espana 40,327
216 Corporacion Mapfre 4,295
200 Dragados & Construcciones SA 5,315
4,300 Endesa SA 96,857
220 Fomento de Construcion Y Contra 10,267
632 Gas Natural SDG SA 44,042
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Spain (cont'd.)
3,611 Iberdrola SA $ 60,241
210 Metrovacesa SA 5,432
1,330 Repsol SA 56,172
164 Sociedade General de Aguas de
Barcelona SA 7,988
740 Tabacalera SA, Ser. A 16,486
4,200 Telefonica de Espana SA 153,141
709 Telepizza 4,741
1,073 Union Electrica Fenosa SA 16,050
300 Vallehermoso SA 3,347
50 Viscofan Industria Navarra Envolturas
Celulosicas SA 1,299
169 Zardoya Otis SA 4,651
------------
769,594
- ------------------------------------------------------------
Sweden--3.8%
2,800 ABB AB, Ser. A 25,375
1,100 ABB AB, Ser. B 9,898
500 AGA AB, Ser. A 6,510
400 AGA AB, Ser. B 4,952
50 Asticus AB 498
5,400 Astra AB, Ser. A 92,360
1,200 Astra AB, Ser. B 19,759
500 Atlas Copco AB, Ser. A 10,530
200 Atlas Copco AB, Ser. B 4,212
100 Diligentia AB 849
500 Drott AB 4,084
1,500 Electrolux AB, Ser. B 19,720
1,400 Forenings Sparbanken AB, Ser. A 32,165
800 Hennes & Mauritz AB, Ser. B 58,204
400 NetCom Systems AB 13,428
400 OM Gruppen AB 6,893
800 Sandvik AB, Ser. A 16,695
200 Sandvik AB, Ser. B 4,187
300 Securitas AB, Ser. B 15,393
2,000 Skandia Forsakring AB 26,039
2,200 Skandinaviska Enskilda Banken, Ser. A 19,235
500 Skanska AB, Ser. B $ 16,497
100 SKF AB, Ser. A 1,264
200 SKF AB, Ser. B 2,476
1,000 Stora Kopparbergs Bergslags
Aktiebolag, Ser. A 9,509
100 Stora Kopparbergs Bergslags
Aktiebolag,
Ser. B 951
800 Svenska Cellulosa AB, Ser. B 15,827
800 Svenska Handelsbanken, Ser. A 30,021
50 Svenska Handelsbanken, Ser. B 1,720
300 Svenskt Stal AB, Ser. A 3,159
1,300 Swedish Match AB 4,049
7,900 Telefonaktiebolaget LM Ericsson 149,237
400 Trelleborg AB, Ser. B 3,370
600 Volvo AB, Ser. A 14,245
1,300 Volvo AB, Ser. B 31,859
300 Wm-Data AB, Ser. B 10,033
------------
685,203
- ------------------------------------------------------------
Switzerland--10.1%
30 ABB AG 30,448
15 ABB AG (Registered) 3,099
70 Adecco SA 25,941
25 Alusuisse-Lonza Holding AG
(Registered) 23,821
1,035 Credit Suisse Group 114,393
5 Danzas Holding AG 1,252
7 Fischer (Georg) AG 1,937
10 Forbo Holding AG 3,901
20 Holderbank Financiere Glarus AG 20,516
35 Holderbank Financiere Glarus AG
(Registered) 7,711
2 Jelmoli Holding AG 2,326
1 Kuoni Reisen AG 3,034
10 Merkur Holding AG 2,257
156 Nestle SA 310,352
251 Novartis AG 402,344
25 Novartis AG (Registered) 40,110
7 Roche Holdings AG 120,854
28 Roche Holdings AG (Registered) 301,377
50 Sairgroup 10,276
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Switzerland (cont'd.)
1 Schindler Holding AG $ 1,138
1 Schindler Holding AG (Registered) 1,234
56 Schweizerische
Rueckversicherungs-Gesellschaft 111,044
3 SGS Societe Generale de Surveillance
Holding SA 2,169
10 SGS Societe Generale de Surveillance
Holding SA (Registered) 1,914
7 Sika Finanz AG 1,972
10 SMH AG 6,003
50 SMH AG (Registered) 7,404
10 Sulzer AG 4,948
841 UBS-Union Bank of Switzerland 164,031
180 Zurich Versicherungs-Gesellschaft 89,330
------------
1,817,136
- ------------------------------------------------------------
United Kingdom--30.4%
5,650 Abbey National plc 97,360
6,150 Allied Zurich 62,917
840 Anglian Water plc 13,533
3,050 Arjo Wiggins Appleton plc 5,222
3,450 Associated British Foods plc 35,148
4,400 BAA plc 44,827
6,150 Barclays plc 100,437
750 Barratt Development plc 2,434
3,457 Bass plc 41,418
1,450 BBA Group plc 7,417
15,629 BG plc 108,630
1,450 BICC plc 1,454
2,800 Blue Circle Industries plc 13,085
2,100 BOC Group plc 26,052
4,100 Boots Co. plc 70,581
550 Bowthorpe plc 3,094
1,900 BPB plc 7,620
7,500 British Aerospace plc 45,501
4,350 British Airways plc 26,613
6,150 British America Tobacco plc 45,986
1,900 British Land Co. plc 18,792
23,200 British Petroleum Co. plc 354,835
7,050 British Sky Broadcasting plc 60,024
7,800 British Steel plc 14,084
25,700 British Telecom plc $ 346,339
13,406 BTR plc 24,206
1,400 Bunzl plc 5,020
750 Burmah Castrol plc 10,655
9,300 Cable & Wireless plc 88,663
4,100 Cadbury Schweppes plc 53,093
1,800 Caradon plc 3,793
2,100 Carlton Communications plc 13,989
16,800 Centrica plc 32,476
1,750 Coats Viyella plc 1,033
300 Cobham plc 3,174
5,100 Commercial Union plc 78,999
2,500 Compass Group plc 23,494
850 De La Rue plc 2,253
14,405 Diageo plc 137,087
1,400 Electrocomponents plc 7,810
1,170 Elementis plc 1,591
3,050 EMI Group plc 18,802
850 English China Clay plc 2,102
1,800 FKI plc 3,487
11,400 General Electric Co. plc 83,305
2,900 GKN plc 29,520
14,200 Glaxo Wellcome plc 419,164
3,600 Granada Group plc 45,272
1,000 Great Portland Estates plc 3,416
4,200 Great Universal Stores plc 47,821
3,047 Guardian Royal Exchange plc 13,230
10,100 Halifax plc 130,446
900 Hammerson plc 6,164
2,000 Hanson plc 12,678
400 Hepworth plc 965
3,400 HSBC Holdings plc (GBP) 63,673
7,100 HSBC Holdings plc (HKD) 127,052
300 Hyder plc 4,749
1,050 IMI plc 4,479
3,000 Imperial Chemical Industries plc 23,630
750 Johnson Matthey plc 3,878
7,850 J. Sainsbury plc 75,173
5,650 Kingfisher plc 52,425
4,450 Ladbroke Group plc 16,561
400 Laird Group plc 1,060
2,000 Land Securities plc 30,997
3,350 LASMO plc 9,906
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
United Kingdom (cont'd.)
5,200 Legal & General Group plc $ 58,323
200 Lex Service plc 1,169
21,450 Lloyds TSB Group plc 240,220
663 Lonrho plc 3,459
5,500 Lucas Varity plc 16,918
11,500 Marks & Spencer plc 88,335
1,156 MEPC plc 9,214
250 Meyer International plc 1,115
2,000 Misys plc 18,184
6,052 National Grid Co. plc 45,047
4,900 National Power plc 43,217
1,400 Next plc 9,992
400 Ocean Group plc 3,657
2,500 P & O Finance plc 23,792
2,500 Pearson plc 46,521
3,850 Pilkington plc 3,729
916 Provident Financial plc 12,142
7,700 Prudential Corp. plc 112,534
1,000 Racal Electronic plc 5,778
2,150 Railtrack Group plc 61,967
3,000 Rank Group plc 11,726
4,600 Reed International plc 38,773
11,400 Rentokil Initial plc 70,276
6,066 Reuters Group plc 50,924
1,900 Rexam plc 5,877
4,400 Rio Tinto Finance plc 52,454
1,000 RMC Group plc 10,876
5,600 Rolls-Royce plc 19,319
6,550 Royal & Sun Alliance Insurance Group
plc 56,768
3,450 Royal Bank Scotland Group plc 39,282
1,750 Rugby Group plc 2,335
4,100 Safeway plc 19,213
1,125 Schroders plc 18,449
2,450 Scottish & Newcastle plc 29,977
4,750 ScottishPower plc 46,011
455 Sears plc 1,198
1,000 Sedgwick Group plc 3,365
8,600 Siebe plc 27,768
1,350 Slough Estates plc 6,814
22,150 Smithkline Beecham plc 243,542
1,150 Smiths Industries plc 13,035
1,600 Southern Electric plc $ 17,878
1,300 St. James's Place Capital plc 5,081
800 Stagecoach Holdings plc 15,471
3,350 Tarmac plc 4,725
1,600 Tate & Lyle plc 8,782
1,250 Taylor Woodrow plc 3,887
26,100 Tesco plc 74,072
1,191 Thames Water plc 23,721
600 Thorn plc 2,541
1,850 TI Group plc 11,192
950 Unigate plc 7,233
13,150 Unilever plc 112,518
1,155 United Biscuits Holding plc 4,024
2,000 United Utilities plc 32,323
766 Vickers plc 1,901
12,250 Vodafone Group plc 142,185
2,492 Williams plc 14,589
750 Willis Corroon Group plc 2,555
2,150 Wolseley plc 10,961
3,850 Zeneca Group plc 136,088
------------
5,475,716
Total common stocks
(cost US$16,903,691) 17,461,890
------------
- ------------------------------------------------------------
PREFERRED STOCKS--0.7%
- ------------------------------------------------------------
Germany--0.7%
10 Dyckerhoff AG, DM 20 3,201
10 Friedrich Grohe AG, DM 30 2,764
15 MAN AG, DM 16 3,060
510 RWE AG, DM 2.29 16,020
170 Sap AG, DM 4.07 80,659
400 Volkswagen AG, DM 11.63 18,189
------------
123,893
- ------------------------------------------------------------
Italy
4,500 Fiat SpA, L 90.91(a) 7,026
------------
Total preferred stocks
(cost US$107,099) 130,919
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL EUROPE INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Warrants/
Rights/Units Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
WARRANTS(a)
- ------------------------------------------------------------
France
20 Axa-UAP, expiring 12/31/98 $ 393
- ------------------------------------------------------------
Germany
12 Munchener
Ruckversicherungs-Gesellschaft
AG, expiring 12/31/98 474
- ------------------------------------------------------------
Italy
400 Mediobanca SpA, expiring 12/31/99 1,072
------------
Total warrants (cost US$0) 1,939
------------
- ------------------------------------------------------------
RIGHTS(a)
- ------------------------------------------------------------
Netherlands
1,624 Koninklijke KNP BT, expiring 10/12/98 6,332
- ------------------------------------------------------------
Spain
50 Viscofan Envoltura, expiring 10/14/98 64
------------
Total rights
(cost US$8,852) 6,396
------------
- ------------------------------------------------------------
COMMON STOCK UNITS(a)
- ------------------------------------------------------------
Ireland
2,600 Waterford Wedgewood plc
(cost US$3,396) 2,409
------------
Total long term investments
(cost US$17,023,038) 17,603,553
------------
<CAPTION>
Principal
Amount
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.3%
- ------------------------------------------------------------
U.S. Government Securities--0.1%
U.S. Treasury Bills
$10,000 4.20%, 12/17/98(b) $ 9,912
10,000 4.64%, 12/17/98(b) 10,013
------------
(cost US$19,811) 19,925
------------
- ------------------------------------------------------------
REPURCHASE AGREEMENTS--1.2%
206,000 Joint Repurchase Agreement Account
5.52%, 10/1/98
(cost US$206,000; Note 5) 206,000
------------
- ------------------------------------------------------------
Total Investments--98.9%
(cost US$17,248,849; Note 4) 17,829,478
Other assets in excess of
liabilities--1.1% 196,832
------------
Net Assets--100% $ 18,026,310
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as collateral for financial futures contracts.
<TABLE>
<S> <C>
The industry classification of portfolio holdings and other
assets in excess of liabilities shown as a percentage of net
assets as of September 30, 1998 was as follows:
Finance............................................... 23.1%
Utilities............................................. 14.1
Health Technology..................................... 11.2
Consumer Nondurables.................................. 7.9
Energy Minerals....................................... 7.6
Process Industries.................................... 6.2
Retail Trade.......................................... 5.5
Producer Manufacturing................................ 4.6
Electronic Technology................................. 3.8
Consumer Durables..................................... 3.0
Commercial Services................................... 2.2
Consumer Services..................................... 2.0
Industrial Services................................... 1.9
Transportation........................................ 1.6
Nonenergy Minerals.................................... 1.5
Technology Services................................... 1.5
Short-Term Investments................................ 1.2
-----
98.9%
Other assets in excess of liabilities................. 1.1
-----
100.0%
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Statement of Assets and Liabilities PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $17,248,849)............................................................... $ 17,829,478
Foreign currency, at value (cost $116,003)............................................................. 117,346
Due from Manager....................................................................................... 187,073
Dividends and interest receivable...................................................................... 92,370
Receivable for investments sold........................................................................ 1,543
Receivable for Fund shares sold........................................................................ 1,133
Other assets........................................................................................... 284
------------------
Total assets........................................................................................ 18,229,227
------------------
Liabilities
Accrued expenses and other liabilities................................................................. 99,815
Payable for Fund shares reacquired..................................................................... 55,738
Payable for investments purchased...................................................................... 34,282
Due to broker - variation margin....................................................................... 6,808
Foreign withholding taxes payable...................................................................... 6,274
------------------
Total liabilities................................................................................... 202,917
------------------
Net Assets............................................................................................. $ 18,026,310
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 1,695
Paid-in capital in excess of par.................................................................... 17,212,907
------------------
17,214,602
Undistributed net investment income................................................................. 213,033
Accumulated net realized gains on investments and foreign currencies................................ 24,945
Net unrealized appreciation on investments and foreign currencies................................... 573,730
------------------
Net assets, September 30, 1998......................................................................... $ 18,026,310
------------------
------------------
Net asset value per share
($18,026,310 / 1,694,799 shares of beneficial interest issued and outstanding)...................... $ 10.64
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Through
Net Investment Income September 30, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes
of $55,782)......................... $ 380,469
Interest............................... 14,880
-----------
Total Income........................ 395,349
-----------
Expenses
Management fee......................... 70,719
Custodian's fees and expenses.......... 253,500
Registration fees...................... 58,000
Reports to shareholders................ 35,000
Legal fees and expenses................ 22,000
Audit fees and expenses................ 18,000
Trustee's fees......................... 7,000
Transfer agent's fees and expenses..... 1,000
Miscellaneous.......................... 587
-----------
Total expenses...................... 465,806
Less: Expense subsidy.................. (358,832)
-----------
Net expenses........................ 106,974
-----------
Net investment income..................... 288,375
-----------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions
Net realized gain (loss) on:
Investment transactions................ 73,748
Financial futures transactions......... (30,593)
Foreign currency transactions.......... (5,161)
-----------
37,994
-----------
Net change in unrealized appreciation
(depreciation) on:
Investments............................ 580,515
Financial futures...................... (12,352)
Foreign currencies..................... 5,567
-----------
573,730
-----------
Net gain on investments and foreign
currencies............................. 611,724
-----------
Net Increase in Net Assets
Resulting from Operations................. $ 900,099
-----------
-----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Increase (Decrease) Through
in Net Assets September 30, 1998
<S> <C>
Operations
Net investment income................... $ 288,375
Net realized gain on investments and
foreign currency transactions........ 37,994
Net change in unrealized appreciation of
investments and foreign currencies... 573,730
---------------------
Net increase in net assets resulting
from operations...................... 900,099
---------------------
Dividends and distributions (Note 1):
Dividends from net investment income.... (108,089)
---------------------
Fund share transactions (Note 6):
Net proceeds from shares sold........... 18,141,700
Net asset value of shares issued in
reinvestment of dividends............ 108,032
Cost of shares reacquired............... (1,015,432)
---------------------
Net increase in net assets from Fund
share transactions................... 17,234,300
---------------------
Total increase............................. 18,026,310
Net Assets
Beginning of period........................ --
---------------------
End of period(b)........................... $18,026,310
---------------------
---------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Includes undistributed net investment income of $175,125.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
Prudential Index Series 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 five separate Funds. Prudential Europe Index Fund
(the 'Fund') commenced investment operations on October 1, 1997 when 1,500,000
shares of beneficial interest of the Fund were sold for $15,000,000 to The
Prudential Insurance Company of America ('The Prudential').
The Fund's investment objective 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, currently the Morgan Stanley Capital
International Europe Index.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Company and the Fund in the preparation of its financial statements.
Securities Valuation: 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 were no sales on such day, at the mean between the last bid and asked
prices on such day or at the bid price in the absence of an asked price.
Securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued by an independent pricing agent or a principal
market maker. 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 subadviser, does not represent fair value, are valued at fair
value as determined by procedures established by the Company's Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Company's policy that its custodian or designated
subcustodians, under triparty repurchase agreements, as the case may be, takes
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the fiscal period. Similarly, the Fund
does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term securities
sold during the fiscal period. Accordingly, realized foreign currency gains
(losses) are included in the reported net realized gains on investment
transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange gains or losses from forward currency contracts, disposition of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on security transactions, and the difference between the amounts of
interest, dividends and foreign taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets and liabilities at
fiscal period end exchange rates are reflected as a component of unrealized
appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign
- --------------------------------------------------------------------------------
B-52
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
portfolio holdings or on specific receivables and payables denominated in a
foreign currency. The contracts are valued daily at current exchange rates and
any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on settlement date of the
contract equal to the difference between settlement value of the original and
renegotiated forward contracts. This gain or loss, if any, is included in net
realized gain (loss) on foreign currency transactions. Risks may arise upon
entering into these contracts from the potential inability of the counter
parties to meet the terms of their contracts.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities or commodities 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 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.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
foreign currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income and distributions of net realized capital and currency gains, if any,
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 meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to shareholders. Therefore, no federal income tax provision is
required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Fund's understanding of the applicable
country's tax rules and rates.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA), Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by $32,747,
decrease accumulated realized gains by $13,049 and decrease paid-in capital in
excess of par by $19,698 relating to net realized foreign currency losses and
nondeductible offering cost. Net investment income, net realized gains and net
assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Company has a management agreement with Prudential Investments Fund
Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for
all investment advisory services and supervises the subadviser's performance of
such services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Company, occupancy
and certain clerical and bookkeeping costs of the Company. The Company bears all
other costs and expenses.
The management fee paid to PIFM is computed daily and payable monthly at an
annual rate of .40 of 1% of the average daily net assets of the Fund.
PIFM has agreed to subsidize the operating expenses of the Fund so that total
Fund operating expenses do not exceed .60% on an annualized basis of the Fund's
average daily net assets. This voluntary waiver may be
- --------------------------------------------------------------------------------
B-53
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
terminated at any time without notice. For the period ended September 30, 1998,
PIFM subsidized $358,832 of the expenses of the Fund (2.02% of average net
assets, or $0.21 per share).
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Fund through May 31, 1998.
Prudential Investment Management Services LLC ('PIMS') became the distributor of
the Fund effective June 1, 1998 and is serving the Fund under the same terms and
conditions as under the arrangement with PSI. No distribution or service fees
are paid to PSI or PIMS as distributor of the Fund.
PSI, PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement during the period
ended September 30, 1998. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds. The Agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Company's transfer agent. During the period October 1, 1997
through September 30, 1998, the Fund incurred fees of approximately $1,000 for
the services of PMFS. As of September 30, 1998, approximately $200 of such fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended September 30, 1998 were $17,644,283 and $656,636,
respectively.
The United States federal income tax cost basis of the Fund's investments at
September 30, 1998 was $17,249,634 and, accordingly, net unrealized appreciation
for federal income tax purposes was $579,844 (gross unrealized
appreciation--$2,333,194; gross unrealized depreciation--$1,753,350).
At September 30, 1998, the Fund had outstanding forward currency contracts to
purchase foreign currencies, as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Purchase Contracts Receivable Value Depreciation
- ------------------------------- --------------- ------- ------------
<S> <C> <C> <C>
British Pound,
expiring 10/2/98.............. $10,000 $10,002 $2
Finnish Markka,
expiring 10/2/98.............. 2,000 2,001 1
Spainsh Peseta,
expiring 10/2/98.............. 6,000 6,001 1
Swiss Franc,
expiring 10/2/98.............. 4,000 4,002 2
-
$6
-
-
</TABLE>
At September 30, 1998, the Prudential Europe Index Series had open buys of 100
EUROTOP and 10 FTSE 100 financial futures contracts expiring on December 19,
1998.
The unrealized depreciation on such contracts as of September 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Value at Value on Unrealized
Acquisition September 30, 1998 Depreciation
----------- ------------------ ------------
<S> <C> <C> <C>
EUROTOP.................. $ 242,300 $230,000 $ 12,300
FTSE 100................. 87,486 87,434 52
------
$ 12,352
------
------
</TABLE>
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of September 30, 1998, the
Fund had a .028% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $206,000 in principal amount. As of
such date, the repurchase
- --------------------------------------------------------------------------------
B-54
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
agreement in the joint account and the value of the collateral therefore was as
follows:agreement in the joint account and the value of the collateral therefore
was as follows:Bear Stearns & Co., 5.58%, in the principal amount of
$210,000,000, repurchase price $210,032,550, due 10/1/98. The value of the
collateral including accrued interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
Goldman Sachs & Co., 5.45%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 10/1/98. The value of the collateral including accrued
interest was $214,200,293.
Warburg Dillon Read LLC., 5.52%, in the principal amount of $210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the collateral
including accrued interest is $214,255,819.
- ------------------------------------------------------------
Note 6. Capital
The Fund has authorized an unlimited number of Class Z shares of beneficial
interest at $.001 par value per share. Class Z shares are not subject to any
sales or redemption charges and are offered exclusively for sale to a limited
group of investors. Transactions in shares of beneficial interest for the period
October 1, 1997 (commencement of investment operations) through September 30,
1998 were as follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Shares sold........................................ 1,771,843
Shares issued in reinvestment of dividends and
distributions.................................... 11,206
Shares reacquired.................................. (88,250)
---------
Net increase in shares outstanding................. 1,694,799
---------
---------
</TABLE>
As of September 30, 1998, 1,518,139 of the outstanding shares were owned by The
Prudential.
- --------------------------------------------------------------------------------
B-55
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Financial Highlights PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Through
September 30, 1998
-------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................................... $ 10.00
------
Income from investment operations
Net investment income(c)................................................................................ .18
Net realized and unrealized gain on investment and foreign currency transactions........................ .53
------
Total from investment operations..................................................................... .71
------
Less distributions
Dividends from net investment income.................................................................... (.07)
------
Net asset value, end of period.......................................................................... $ 10.64
------
------
TOTAL RETURN(d):........................................................................................ 7.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................................................................... $18,026
Average net assets (000)................................................................................ $17,728
Ratios to average net assets:(b)(c)
Expenses............................................................................................. .60%
Net investment income................................................................................ 1.64%
Portfolio turnover...................................................................................... 4%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total returns are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Report of Independant Accountants PRUDENTIAL EUROPE INDEX FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Index Series Fund--Prudential Europe Index Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Index Series
Fund--Prudential Europe Index Fund (the 'Fund', one of the portfolios
constituting Prudential Index Series Fund) at September 30, 1998, and the
results of its operations, the changes in its net assets and the financial
highlights for the period October 1, 1997 (commencement of operations) through
September 30, 1998, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
B-57
<PAGE>
Portfolio of Investments as of PRUDENTIAL INDEX SERIES FUND
September 30, 1998 PRUDENTIAL PACIFIC INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.7%
COMMON STOCKS--97.1%
- ------------------------------------------------------------
Australia--9.3%
6,600 Amcor Ltd. $ 22,972
8,000 Amp Ltd. 96,892
3,049 Australian Gas & Light Co. 20,983
7,600 Australian National Industries Ltd. 3,331
11,823 Boral Ltd. 16,455
2,300 Brambles Industries, Ltd. 49,621
22,597 Broken Hill Proprietary Co., Ltd. 161,667
9,265 Coca Cola Amatil Ltd. 24,413
12,196 Coles Myer Ltd. 52,006
9,682 Crown Ltd.(a) 2,236
10,300 CSR, Ltd. 21,662
2,869 Email Ltd. 4,401
1,231 F. H. Faulding Co. Ltd. 4,877
20,000 Fosters Brewing Group 43,590
4,766 Futuris Corp., Ltd. 3,980
12,313 General Property Trust 21,148
6,444 GIO Australia Holdings Ltd. 19,502
13,005 Goodman Fielder Ltd. 17,022
2,340 Great Central Mines Ltd. 1,871
4,000 Hardie (James) Industries 7,671
2,700 ICI Australia Ltd. 13,112
2,700 Leighton Holdings Ltd. 8,811
2,539 Lend Lease Corp. Ltd. 54,134
16,933 M.I.M. Holdings Ltd. 7,923
15,400 National Australia Bank Ltd. 185,961
2,300 Newcrest Mining Ltd.(a) 2,970
20,533 News Corp., Ltd. 132,308
17,499 Normandy Mining Ltd. 14,768
7,517 North Ltd. 14,077
10,400 Pacific Dunlop Ltd. 17,659
9,200 Pioneer International Ltd. 17,163
3,673 QBE Insurance Group Ltd. 13,378
6,473 QCT Resources Ltd. 4,294
3,300 Rio Tinto Ltd. 39,909
2,100 RGC Ltd. 3,134
1,200 Rothmans Holdings 8,258
6,406 Southcorp Ltd. 17,820
6,200 Santos Ltd. 17,148
4,000 Schroders Propriety Fund $ 6,112
1,800 Smith (Howard) Ltd. 9,488
5,300 Star City Holdings Ltd. 3,013
3,315 Stockland Trust Group 7,304
3,000 Tabcorp Holdings Ltd. 17,412
53,500 Telstra Corp. 149,777
11,718 Western Mining Corp. Holdings Ltd. 35,234
12,796 Westfield Trust 25,388
19,500 Westpac Banking Corp. 107,243
------------
1,530,098
------------
- ------------------------------------------------------------
Hong Kong--7.4%
13,000 Bank of East Asia 18,371
35,000 Cathay Pacific Air 32,974
24,000 Cheung Kong Ltd. 111,196
26,000 China Light & Power Holdings, Ltd. 126,838
20,000 Chinese Estates Holdings 2,271
3,000 Dickson Concept Inc. 2,342
11,000 Hang Lung Deveopment Co. 9,654
20,000 Hang Seng Bank Ltd. 126,476
44,000 Hong Kong & China Gas Co. 53,946
11,000 Hong Kong & Shanghai Hotels 6,104
2,000 Hong Kong Aircraft Engineering Co.,
Ltd. 2,375
124,000 Hong Kong Telecommunications Ltd. 244,047
44,000 Hopewell Holdings Ltd. 4,429
41,000 Hutchison Whampoa Ltd. 215,887
9,000 Hysan Development Co. 6,214
8,000 Johnson Electric Holdings, Ltd. 15,177
4,000 Kumagai Gumi Ltd. 1,071
6,000 Miramar Hotel & Investment Co. 4,259
21,000 New World Development Co., Ltd. 28,186
14,000 Oriental Press Group 1,482
6,000 Peregrine Investments 8
38,000 Regal Hotel International 2,795
16,000 Shangri La Asia Ltd. 10,325
14,000 Shun Tak Holdings Ltd. 867
32,000 Sino Land Co. 8,177
14,000 South China Morning Post 5,511
25,000 Sun Hung Kai Properties Ltd. 88,566
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
Portfolio of Investments as of PRUDENTIAL INDEX SERIES FUND
September 30, 1998 PRUDENTIAL PACIFIC INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Hong Kong (cont'd.)
16,000 Swire-Pacific, Ltd. 'A' $ 50,384
21,000 Tan Chong International 645
4,000 Television Broadcasts Ltd. 10,221
2,000 Varitronix International, Ltd. 3,885
23,000 Wharf Holdings Ltd. 24,340
2,000 Wing Lung Bank 4,078
------------
1,223,101
------------
- ------------------------------------------------------------
Japan--76.9%
4,000 77th Bank(a) 32,648
1,500 Acom Co., Ltd. 80,884
1,000 Advantest Corp. 42,609
7,000 Ajinomoto Co., Inc. 56,053
2,000 Alps Electric Co. 24,111
3,000 Amada Co. 13,885
1,000 Amano Corp. 8,000
3,000 Aoki Corp. 882
800 Aoyama Trading Co., Ltd. 17,103
500 Arabian Oil Co. 6,634
24,000 Asahi Bank 67,000
5,000 Asahi Breweries 59,506
16,000 Asahi Chemical Industries 48,898
12,000 Asahi Glass Co. 58,184
5,000 Ashikaga Bank 7,016
400 Autobacs Seven Co. 10,667
48,000 Bank Of Tokyo-Mitsubishi, Ltd. 308,551
11,000 Bank of Yokohama 20,445
9,000 Bridgestone Corp. 181,825
3,000 Brother Industries 6,612
9,000 Canon Inc. 183,147
3,000 Casio Computer Co. 19,196
8,000 Chiba Bank 25,859
6,000 Chichibu Onoda Cement Corp. 12,122
2,000 Chiyoda Corp. 1,984
2,000 Chugai Pharmacy Co. 13,708
3,000 Citizen Watch Co. 20,386
5,000 Cosmo Oil Co. 6,281
1,600 Credit Saison Co., Ltd. 31,031
600 CSK Corp. 9,301
8,000 Dai Nippon Printing Co., Ltd. 102,968
4,000 Daicel Chemical Industries $ 6,406
4,000 Daido Steel Co. 4,261
7,000 Daiei Inc. 15,942
1,000 Daifuku Co. 3,703
3,000 Daiichi Pharmaceutical Co. 40,244
3,000 Daikin Industries 20,959
2,000 Daikyo Inc. 1,881
3,000 Daimaru Inc. 6,612
8,000 Dainippon Ink & Chemicals, Inc. 15,633
2,000 Dainippon Screen Manufacturing Co.,
Ltd. 3,776
1,400 Daito Trust Construction Co., Ltd. 9,010
6,000 Daiwa House Industries 54,658
2,000 Daiwa Kosho Lease Co., Ltd. 6,450
14,000 Daiwa Securities Co., Ltd. 32,912
5,000 Denki Kagaku Kogyo K.K. 7,383
9,000 Denso Corp. 131,244
41 East Japan Railway Co. 204,819
3,000 Ebara Corp. 19,902
3,000 Eisai Co., Ltd. 36,497
1,000 Ezaki Glico Co. 5,040
2,400 Fanuc Ltd. 71,408
30,000 Fuji Bank 60,608
5,000 Fuji Photo Film Co. 172,642
3,000 Fujikura Ltd. 11,108
5,000 Fujita Corp. 1,800
1,000 Fujita Kanko Inc. 8,081
19,000 Fujitsu Ltd. 164,708
7,000 Furukawa Electric Co., Ltd. 19,953
1,000 Gakken Co. 1,036
5,000 Gunma Bank 33,426
2,000 Gunze Ltd. 4,305
9,000 Hankyu Corp. 31,075
2,000 Hankyu Department Stores 9,991
3,000 Hazama Corp. 1,344
3,000 Higo Bank 11,350
400 Hirose Electric Co., Ltd. 20,599
35,000 Hitachi Ltd. 154,276
10,000 Hitachi Zosen Corp. 13,224
6,000 Hokuriku Bank 7,317
10,000 Honda Motor Co., Ltd. 304,878
1,000 House Foods Corp. 12,562
1,000 Hoya Corp. 35,998
2,000 Inax Corp. 7,170
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
Portfolio of Investments as of PRUDENTIAL INDEX SERIES FUND
September 30, 1998 PRUDENTIAL PACIFIC INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Japan (cont'd.)
26,000 Indonesia Bank $ 95,504
2,000 Isetan Co. 16,529
3,000 Ishihara Sangyo Kaisha(a) 4,011
4,000 Ito Yokado Co., Ltd. 191,008
15,000 Itochu Corp. 18,733
2,000 Itoham Foods Inc. 6,979
2,000 Iwatani International Corp. 2,939
1,000 Jaccs Co., Ltd. 3,798
18,000 Japan Air Lines Co.(a) 41,654
11,000 Japan Energy Corp. 10,344
4,000 Japan Steel Works 4,026
2,000 JGC Corp. 3,967
9,000 Joyo Bank 32,133
3,000 Jusco Co. 41,985
10,000 Kajima Corp. 24,243
3,000 Kamigumi Co., Ltd. 12,166
2,000 Kandenko Co. 10,917
5,000 Kanebo Ltd.(a) 3,857
4,000 Kaneka Corp. 22,539
10,100 Kansai Electrical Power 174,739
3,000 Kansai Paint Co. 5,510
7,000 Kao Corp. 112,107
1,000 Katokichi Co. 11,607
15,000 Kawasaki Heavy Industries 30,304
6,000 Kawasaki Kisen Ltd. 8,816
33,000 Kawasaki Steel Corp. 38,789
5,000 Keihin Electric Express Railway Co.,
Ltd. 13,150
2,000 Kikkoman Corp. 10,021
3,000 Kinden Corp. 34,514
17,000 Kinki Nippon Railway 73,810
11,000 Kirin Brewery Co. 88,246
1,000 Kissei Pharmaceutical Co., Ltd. 14,179
1,000 Kokuyo Co. 13,297
10,000 Komatsu Ltd. 46,650
1,000 Komori Corp. 17,815
300 Konami Co. 8,066
4,000 Konica Corp. 15,310
2,000 Koyo Seiko Co. 10,138
14,000 Kubota Corp. 26,844
7,000 Kumagai Gumi Co.(a) 3,805
3,000 Kurabo Industries 2,997
3,000 Kuraray Co. $ 27,108
2,000 Kureha Chemical Industry Co., Ltd. 4,026
1,000 Kurita Water Industries 10,432
1,900 Kyocera Corp. 83,191
4,000 Kyowa Hakko Kogyo Co., Ltd. 15,574
1,000 Kyudenko Co., Ltd. 5,951
3,000 Lion Corp. 10,447
1,000 Maeda Road Construction Co. 5,165
1,000 Makino Milling Machine 5,804
2,000 Makita Corp. 23,009
15,000 Marubeni Corp. 17,742
3,000 Maruha Corp. 2,711
4,000 Marui Co.(a) 58,184
22,000 Matsushita Electric Industrial Co.,
Ltd. 299,809
3,000 Meiji Milk Product Co., Ltd. 7,053
4,000 Meiji Seika Kaisha 11,460
4,000 Minebea Co.(a) 32,648
1,000 Misawa Homes Co. 2,395
23,000 Mitsubishi Chemical Corp. 44,270
16,000 Mitsubishi Corp. 77,579
22,000 Mitsubishi Electric Corp. 33,941
13,000 Mitsubishi Estate Co., Ltd. 85,285
5,000 Mitsubishi Gas Chemicals Co. 11,277
35,000 Mitsubishi Heavy Industries Ltd. 120,078
2,000 Mitsubishi Logistc Corp. 16,529
12,000 Mitsubishi Material Corp. 21,599
5,000 Mitsubishi Oil Co. 5,951
3,000 Mitsubishi Paper Mills 5,135
6,000 Mitsubishi Rayon Co. 14,634
13,000 Mitsubishi Trading & Banking 45,842
16,000 Mitsui & Co 66,059
8,000 Mitsui Engineering & Shipbuilding
Co., Ltd.(a) 5,642
8,000 Mitsui Fudosan Co., Ltd. 41,081
8,000 Mitsui Marine & Fire Insurance Co.,
Ltd. 32,912
5,000 Mitsui Mining & Smelting Co. 20,974
11,000 Mitsui O.S.K. Lines 15,920
1,000 Mitsui Soko Co. 2,645
12,000 Mitsui Trust & Banking Co. 10,667
5,000 Mitsukoshi Ltd. 10,285
1,000 Mori Seiki Co. 10,212
2,000 Murata Manufacturing Co., Ltd. 67,734
3,000 Mycal Corp. 17,191
2,000 Nagase & Co. 7,170
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
Portfolio of Investments as of PRUDENTIAL INDEX SERIES FUND
September 30, 1998 PRUDENTIAL PACIFIC INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Japan (cont'd.)
8,000 Nagoya Railroad Co. $ 24,096
500 Namco Ltd. 11,571
5,000 Nankai Electric Railway Co. 20,019
16,000 NEC Corp. 104,026
4,000 NGK Insulators Ltd. 38,055
2,000 NGK Spark Plug Co. 16,280
5,000 Nichido Fire & Marine Insurance 22,076
3,000 Nichirei Corp. 5,069
3,000 Nihon Cement Co. 5,069
4,000 Nikon Corp. 28,416
1,000 Nippon Comsys Corp. 10,079
11,000 Nippon Express Co., Ltd. 47,678
6,000 Nippon Fire & Marine Insurance 19,174
5,000 Nippon Light Metal Co., Ltd. 4,555
2,000 Nippon Meat Packers, Inc. 23,244
13,000 Nippon Oil Co. 34,381
10,000 Nippon Paper Industries Co. 30,929
1,000 Nippon Sharyo Ltd. 1,984
4,000 Nippon Sheet Glass Co. 6,435
3,000 Nippon Shinpan Co. 3,967
2,000 Nippon Shokubai Co. 8,669
72,000 Nippon Steel Corp. 103,673
3,000 Nippon Suisan Kaisha(a) 2,887
132 Nippon Telegraph & Telephone Corp. 964,884
12,000 Nippon Yusen K.K. 35,351
3,000 Nishimatsu Construction Co. 13,378
26,000 Nissan Motor Co., Ltd.(a) 72,583
2,000 Nisshinbo Industries, Inc. 6,612
1,000 Nissin Food Products Co., Ltd. 15,501
2,000 Nitto Denko Corp. 23,509
38,000 NKK Corp. 18,983
2,000 NOF Corp. 3,012
20,000 Nomura Securities Co., Ltd. 143,991
2,000 Noritake Co. 8,448
6,000 NSK Ltd. 20,717
5,000 NTN Corp. 12,673
8,000 Obayashi Corp. 28,504
7,000 Odakyu Electric Railway 19,542
11,000 Oji Paper Co. 37,254
1,000 Okuma Corp. 4,408
3,000 Okumura Corp. 9,146
3,000 Olympus Optical Co. $ 33,037
3,000 Omron Corp. 29,863
2,000 Onward Kashiyama & Co., Ltd. 24,640
3,000 Orient Corp. 5,642
700 Orix Corp. 48,597
26,000 Osaka Gas Co. 66,280
100 Oyo Corp. 1,387
4,000 Penta-Ocean Construction 7,111
2,000 Pioneer Electronic Corp. 33,132
2,000 Q.P. Corp. 12,871
3,000 Renown Inc. 1,433
1,000 Rohm Co., Ltd. 95,504
38,000 Sakura Bank 55,833
1,000 Sanden Corp. 5,973
2,000 Sankyo Aluminium Industry Co. 1,322
5,000 Sankyo Co. 110,931
1,000 Sanrio Co.(a) 9,477
2,000 Sanwa Shutter Corp. 7,611
20,000 Sanyo Electric Co. 52,454
3,000 Sapporo Breweries 9,256
1,000 Secom Co., Ltd. 62,445
1,000 Sega Enterprises Ltd. 16,897
1,000 Seino Transportation Co. 5,076
2,000 Seiyu Ltd. 3,776
6,000 Sekisui Chemical Corp., Ltd. 22,833
8,000 Sekisui House Ltd. 65,178
12,000 Sharp Corp. 71,672
500 Shimachu Co. 7,530
1,000 Shimano Inc. 22,701
8,000 Shimizu Corp. 21,099
4,000 Shin-Etsu Chemical Co., Ltd. 63,620
4,000 Shionogi & Co. 23,244
4,000 Shiseido Co., Ltd. 35,410
8,000 Shizuoka Bank 73,465
11,000 Showa Denko KK 7,273
1,000 Skylark Co. 9,697
700 SMC Corp. 47,517
3,000 Snow Brand Milk Products 9,102
4,300 Sony Corp. 299,787
33,000 Sumitomo Bank 230,311
18,000 Sumitomo Chemical Co., Ltd. 53,820
11,000 Sumitomo Corp. 44,042
7,000 Sumitomo Electric Industries 67,984
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
Portfolio of Investments as of PRUDENTIAL INDEX SERIES FUND
September 30, 1998 PRUDENTIAL PACIFIC INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Japan (cont'd.)
2,000 Sumitomo Forestry Co., Ltd. $ 9,830
6,000 Sumitomo Heavy Industries Ltd. 9,345
7,000 Sumitomo Marine & Fire Insurance Co. 33,683
34,000 Sumitomo Metal Industries(a) 31,972
6,000 Sumitomo Metal Mining Co. 18,998
5,000 Sumitomo Osaka Cement Co. 8,265
10,000 Taisei Corp. 16,970
4,000 Taisho Pharmacy Co., Ltd. 84,337
1,000 Taiyo Yuden Co. 9,998
2,000 Takara Shuzo Co. 8,228
1,000 Takara Standard Co., Ltd. 6,862
3,000 Takashimaya Co. 19,196
9,000 Takeda Chemical Industries 241,331
1,000 Takuma Co., Ltd. 5,657
10,000 Teijin Ltd. 26,447
3,000 Teikoku Oil Co. 8,155
2,000 Toa Corp. 2,645
9,000 Tobu Railway Co. 21,488
1,000 Toei Co. 2,351
200 Toho Co. 20,555
5,000 Tohoku Electrical Power Co., Inc. 74,199
21,000 Tokai Bank 74,824
16,000 Tokio Marine & Fire Insurance Co. 143,403
2,000 Tokyo Broadcasting System Inc. 18,102
2,000 Tokyo Dome Corp. 8,081
14,100 Tokyo Electric Power Co. 270,357
2,000 Tokyo Electron Ltd. 48,927
30,000 Tokyo Gas Co. 63,253
1,400 Tokyo Steel Manufacturing Co. 4,926
1,000 Tokyo Style Co. 8,559
2,000 Tokyo Tatemono Co., Ltd. 1,910
3,000 Tokyotokeiba Co. 3,592
11,000 Tokyu Corp. 24,567
7,000 Toppan Printing Co. 72,047
15,000 Toray Industries Inc. 61,159
5,000 Tosoh Corp. 7,016
2,000 Tostem Corp. 27,329
4,000 Toto Ltd. 22,039
2,000 Toyo Engineering 1,837
2,000 Toyo Seikan Kaisha 26,080
7,000 Toyobo Co. 7,817
3,000 Toyoda Auto Loom Works Ltd. $ 46,283
40,000 Toyota Motor Corp. 896,268
2,000 Tsubakimoto Chain Co. 4,599
8,000 Ube Industries Ltd. 9,756
600 Uni-Charm Corp. 23,494
5,000 Unitika Ltd.(a) 2,939
2,000 Uny Co. 31,443
2,000 Wacoal Corp. 19,218
2,000 Yamaguchi Bank 18,219
2,000 Yamaha Corp. 15,134
12,000 Yamaichi Securities Co.(d) 0
3,000 Yamanouchi Pharmaceutical Co., Ltd. 64,796
4,000 Yamato Transport Co. 43,491
2,000 Yamazaki Baking Co. 19,057
15,000 Yasuda Trust & Banking(a) 7,714
3,000 Yokogawa Electric Corp. 12,254
------------
12,643,717
------------
- ------------------------------------------------------------
Malaysia--0.5%
10,000 Amsteel Corp. 718
6,000 Berjaya Land Berhad 1,503
2,000 Edaran Otomobil 1,503
8,000 Golden Hope Plants 3,492
6,000 Highlands & Lowlands 2,121
9,000 Ioi Corp. 2,354
3,000 Jaya Tiasa Holdings 1,503
6,000 Kuala Lumpur Kepong Berhad 4,707
16,000 Magnum Corp. Berhad 3,094
10,000 Malayan Banking Berhad 7,182
4,000 Malaysia International Shipping
Corp. 2,814
1,000 Nestle Malay Berhad 2,505
3,200 Oriental Holdings Berhad 2,369
4,000 Perlis Plantations Berhad 2,475
8,800 Public Bank Berhad 1,491
10,000 Resorts World Berhad 6,261
2,200 Rothmans of Pall Mall Berhad 6,644
350 Silverstone Berhad(b) 0
6,000 Sime Darby Berhad 2,807
11,000 Telekom Malaysia Berhad 12,155
11,000 Tenaga Nasional Berhad 7,414
10,000 YTL Corp. 5,488
------------
80,600
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-62
<PAGE>
Portfolio of Investments as of PRUDENTIAL INDEX SERIES FUND
September 30, 1998 PRUDENTIAL PACIFIC INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
New Zealand--0.7%
27,900 Brierley Investments Ltd. $ 5,027
16,000 Carter Holt Harvey Ltd. 10,571
3,300 Fletcher Challenge Building 3,171
3,400 Fletcher Challenge Energy, Ltd. 5,071
8,000 Fletcher Challenge Forestry, Ltd. 1,642
6,700 Fletcher Challenge Paper 3,353
5,500 Lion Nathan Ltd. 13,213
19,300 Telecom Corp. Of New Zealand 73,896
------------
115,944
------------
- ------------------------------------------------------------
Singapore--2.3%
8,000 City Developments Ltd. 17,570
1,000 Creative Technology Ltd.(a) 9,200
2,000 Cycle & Carriage Ltd.(a) 3,241
10,000 DBS Land, Ltd. 6,945
7,500 Development Bank of Singapore Ltd. 30,272
3,000 First Capital Corp. 890
3,000 Fraser & Neave Ltd. 6,446
4,000 Hotel Properties Ltd. 926
2,000 Inchcape Motors Ltd. 1,003
2,000 Inchcape Marketing 528
8,000 Keppel Corp., Ltd. 9,450
3,000 Natsteel Ltd. 2,208
7,000 Neptune Orient Lines Ltd. 1,433
12,000 Overseas Chinese Banking Corp., Ltd. 30,201
1,000 Overseas Union Enterprise 1,235
3,000 Parkway Holdings Ltd. 3,455
14,000 S.T. Engineering(a) 13,462
1,000 Sembawang Shipyards Corp., Ltd. 1,668
10,000 Singapore Airlines Ltd. 54,906
3,828 Singapore Press Holdings Ltd. 31,811
7,000 Singapore Technologies Industrial
Corp. 6,856
64,000 Singapore Telecommunication 107,128
3,000 Straits Trading Co.(a) 1,336
10,000 United Overseas Bank Ltd. 29,204
6,000 United Overseas Land 2,422
10,000 United Industrial Corp. 2,908
------------
376,704
------------
Total common stocks
(cost US$24,874,915) 15,970,164
------------
PREFERRED STOCKS--0.6%
Australia
18,686 News Corp. Ltd.
(cost US$80,671) $ 104,028
WARRANTS(a)
Hong Kong
2,000 Hong Kong & China Gas
Warrants expiring September 1999
@ HKD $12.27 91
900 Hysan Development
Warrants expiring April 1999
@ HKD $16.00 1
1,150 Wharf Holdings Ltd.
Warrants expiring December 1999
@ HKD $7.50 22
800 Kumagai Gumi Ltd.
Warrants expiring December 1999
@ HKD $5.00 10
------------
Total Warrants 124
------------
Total long-term investments
(cost US$24,955,586) 16,074,316
------------
Principal
Amount
(000)
SHORT-TERM INVESTMENTS--0.2%
- ------------------------------------------------------------
U.S. Government Securities
United States
United States Treasury Bills(c),
$25 4.20%, 12/17/98
(cost US$24,734) 24,780
------------
- ------------------------------------------------------------
Total Investments--97.9%
(cost US$24,980,320; Note 4) 16,099,096
Other assets in excess of
liabilities--2.1% 342,061
------------
Net Assets--100% $ 16,441,157
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Issue in bankruptcy.
(c) Pledged as initial margin for financial futures contracts.
(d) Fair-valued security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63
<PAGE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL PACIFIC INDEX FUND
Portfolio of Investments as of September 30, 1998
- ------------------------------------------------------------
The industry classification of portfolio holdings and other
assets in excess of liabilities shown as a percentage of net
assets as of September 30, 1998 was as follows:
<TABLE>
<S> <C>
Commercial Banking.................................... 10.7%
Telecommunications.................................... 9.4
Automobiles & Auto Parts.............................. 8.7
Electronics........................................... 4.7
Appliances & Household Durables....................... 4.7
Electrical Utilities.................................. 4.0
Drugs & Health Care................................... 4.0
Retail................................................ 3.4
Real Estate........................................... 3.4
Diversified Industries................................ 2.9
Chemicals............................................. 2.8
Railroads............................................. 2.5
Food & Beverages...................................... 2.4
Financial Services.................................... 2.2
Machinery & Equipment................................. 2.1
Building & Construction............................... 2.0
Oil & Gas............................................. 1.8
Photography........................................... 1.7
Insurance............................................. 1.7
Broadcasting & Other Media............................ 1.6
Transportation & Warehousing.......................... 1.5
Wholesale............................................. 1.4
Mining................................................ 1.4
Printing & Publishing................................. 1.3
Iron & Steel.......................................... 1.3
Office Equipment & Supplies........................... 1.2
Engineering & Construction............................ 1.2
Electrical Equipment.................................. 1.2%
Rubber................................................ 1.1
Cosmetics & Toiletries................................ 1.0
Computers............................................. 1.0
Electronic Components................................. 0.9
Airlines.............................................. 0.8
Paper................................................. 0.6
Health Care/Acute..................................... 0.6
Building Materials & Components....................... 0.6
Property Investment................................... 0.4
Metals................................................ 0.4
Glass Products........................................ 0.4
Entertainment......................................... 0.4
Business Services..................................... 0.4
Hotels................................................ 0.3
Diversified Resources................................. 0.3
U.S. Treasury Securities.............................. 0.2
Gaming................................................ 0.2
Containers............................................ 0.2
Beverages............................................. 0.2
Apparel............................................... 0.2
Tobacco............................................... 0.1
Textiles.............................................. 0.1
Paper & Packaging..................................... 0.1
Computer Software & Services.......................... 0.1
Automobiles........................................... 0.1
Agriculture Sector.................................... 0.1
-----
98.0%
Other assets in excess of liabilities................. 2.0
-----
100.0%
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-64
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Statement of Assets and Liabilities PRUDENTIAL PACIFIC INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $24,980,320)............................................................... $ 16,099,096
Foreign currency, at value (cost $179,687)............................................................. 168,132
Cash................................................................................................... 7,757
Receivable for investments sold........................................................................ 130,077
Due from manager....................................................................................... 122,097
Dividends and interest receivable...................................................................... 64,196
Receivable for Fund shares sold........................................................................ 1,400
Other assets........................................................................................... 221
------------------
Total assets........................................................................................ 16,592,976
------------------
Liabilities
Accrued expenses....................................................................................... 70,234
Payable for investments purchased...................................................................... 68,750
Foreign withholding taxes payable...................................................................... 8,677
Due to broker-variation margin......................................................................... 3,219
Payable for Fund shares repurchased.................................................................... 939
------------------
Total liabilities................................................................................... 151,819
------------------
Net Assets............................................................................................. $ 16,441,157
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 25,781
Paid-in capital in excess of par.................................................................... 25,556,412
------------------
25,582,193
Undistributed net investment income................................................................. 149,497
Accumulated net realized loss on investments........................................................ (389,881)
Net unrealized depreciation on investments and foreign currencies................................... (8,900,652)
------------------
Net assets, September 30, 1998......................................................................... $ 16,441,157
------------------
------------------
Net asset value per share
($16,441,157 / 2,578,120 shares of beneficial interest issued and outstanding)...................... $ 6.38
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-65
<PAGE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL PACIFIC INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
September 30,
Net Investment Income 1998
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $28,867)............................. $ 270,050
Interest................................... 3,787
-------------
Total income............................ 273,837
-------------
Expenses
Management fee............................. 79,309
Custodian's fees and expenses.............. 200,000
Registration fees.......................... 55,000
Legal fees and expenses.................... 20,000
Audit fees and expenses.................... 18,000
Reports to shareholders.................... 15,000
Trustees' fees............................. 7,000
Transfer agent's fees and expenses......... 300
Miscellaneous.............................. 5,620
-------------
Total operating expenses................ 400,229
Less: Expense subsidy (Note 2)............. (281,526)
-------------
Net expenses............................ 118,703
-------------
Net investment income......................... 155,134
-------------
Realized and Unrealized Loss on
Investments and Foreign Currency Transactions
Net realized loss on:
Investment transactions.................... (358,357)
Foreign currency transactions.............. (28,133)
Financial futures contracts................ (10,919)
-------------
(397,409)
-------------
Net change in unrealized depreciation on:
Investments................................ (8,581,191)
Foreign currencies......................... (3,727)
Financial futures contracts................ (7,251)
-------------
(8,592,169)
-------------
Net loss on investments and foreign
currencies................................. (8,989,578)
-------------
Net Decrease in Net Assets
Resulting from Operations..................... $(8,834,444)
-------------
-------------
</TABLE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL PACIFIC INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
September 24, 1997(a)
Year Ended Through
Increase (Decrease) September 30, September 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income...... $ 155,134 $ 53,553
Net realized loss on
investments and foreign
currency transactions... (397,409) (46,210)
Net change in unrealized
depreciation on
investments and foreign
currencies.............. (8,592,169) (308,483)
------------- ---------------------
Net decrease in net assets
resulting from
operations.............. (8,834,444) (301,140)
------------- ---------------------
Dividends from net investment
income (Note 1)............ (25,244) --
------------- ---------------------
Fund share transactions (Note
5)
Net proceeds from shares
sold.................... 942,289 25,000,200
Net asset value of shares
issued in reinvestment
of dividends............ 25,244 --
Cost of shares
reacquired.............. (365,748) --
------------- ---------------------
Net increase in net assets
from Fund share
transactions............ 601,785 25,000,200
------------- ---------------------
Total increase (decrease)..... (8,257,903) 24,699,060
------------- ---------------------
Net Assets
Beginning of period........... 24,699,060 0
------------- ---------------------
End of period(b).............. $ 16,441,157 $24,699,060
------------- ---------------------
------------- ---------------------
- ---------------
(a) Commencement of investment operations.
(b) Includes undistributed net
investment income of...... $ 149,497 $ 7,343
------------- ---------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-66
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL PACIFIC INDEX FUND
- --------------------------------------------------------------------------------
Prudential Index Series 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 five separate funds. Prudential Pacific Index Fund (the
'Fund') commenced investment operations on September 24, 1997 when 2,500,020
shares of beneficial interest of the Fund were sold for $25,000,200 to The
Prudential Insurance Company of America ('The Prudential'). The investment
objective of the 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, currently the Morgan Stanley Capital
International Pacific Free Index ('MSCI-PFI').
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Company and the Fund in the preparation of its financial statements.
Securities Valuation: 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 in the absence of an asked price.
Securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued by an independent pricing agent or a principal
market maker. U.S. Government securities for which market quotations are readily
available are 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 methodology or provides a valuation or methodology that,
in the judgment of the subadviser, does not represent fair value, are valued at
fair value as determined by procedures established by the Company's Trustees.
Due to current market conditions, the Company's Board of Directors reduced the
valuation of securities held in Malaysian currency by 30 percent effective
September 30, 1998.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Company's policy that its custodian or designated
subcustodians under triparty repurchase agreements, as the case may be, takes
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.
All securities are valued as of 4:15 p.m., New York time.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal year, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the fiscal year. Similarly, the Fund
does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term debt
securities sold during the fiscal year. Accordingly, realized foreign currency
gains (losses) are included in the reported net realized gains on investment
transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange gains or losses from forward currency contracts, disposition of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on security transactions, and the difference between the amounts of
interest, dividends and foreign taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets and liabilities at
fiscal year-end exchange rates are reflected as a component of unrealized
appreciation on investments and foreign currencies.
- --------------------------------------------------------------------------------
B-67
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL PACIFIC INDEX FUND
- --------------------------------------------------------------------------------
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
foreign currency transactions 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 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 aniticipated 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: The Fund expects to pay dividends of net investment
income and distributions of net realized capital and currency gains, if any,
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: For federal income tax purposes, each fund in the Company is treated as a
separate tax paying entity. 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 income to shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Fund's understanding of the applicable
country's tax rules and rates.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by $12,264,
decrease accumulated net realized loss on investments by $7,528, and decrease
paid-in-capital by $19,792 for certain expenses not being deductible for tax
purposes and for net realized foreign currency losses. Net investment income,
net realized gains and net assets were not affected by these changes.
- ------------------------------------------------------------
Note 2. Agreements
The Company has a management agreement with Prudential Investments Fund
Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for
all investment advisory services and supervises the subadviser's performance of
such services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Company. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Company, occupancy
and certain clerical and bookkeeping costs of the Company. The Company bears 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.
PIFM has agreed to subsidize the operating expenses of the Fund so that total
Fund operating expenses do not exceed .60% on an annualized basis of the Fund's
average daily net assets. This voluntary waiver may be terminated at any time
without notice. For the year ended September 30, 1998, PIFM subsidized $281,526
of the expenses of the Fund (1.42% of average net assets $0.11 per share).
- --------------------------------------------------------------------------------
B-68
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL PACIFIC INDEX FUND
- --------------------------------------------------------------------------------
The Company had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Company through May 31, 1998.
Prudential Investment Management Services ('PIMS') became the Company's
distributor effective June 1, 1998 and is serving the Company under the same
terms and conditions as under the arragement with PSI. No distribution or
service fees are paid to PIMS as distributor of the Fund.
PSI, PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential.
The Company, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement during the year ended
September 30, 1998. The Funds pay a commitment fee at an annual rate of .055 of
1% on the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro rata basis by the Funds. The Agreement expired on
December 30, 1997 and has been extended through December 29, 1998 under the same
terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Company's transfer agent. During the year ended September 30,
1998, the Fund incurred fees of approximately $200 for the services of PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1998 were $1,057,544 and $302,382,
respectively.
The cost basis of investments for federal income tax purposes at September 30,
1998 was $24,985,283 and, accordingly, net unrealized depreciation for federal
income tax purposes was $8,886,187 (gross unrealized appreciation--$152,556;
gross unrealized depreciation--$9,038,743).
The Fund elected to treat approximately $20,600 of net currency losses and
$376,500 of net capital losses incurred during the 11-month period ended
September 30, 1998 as having been incurred in the following fiscal year.
During the year ended September 30, 1998, the Fund entered into financial
futures contracts. Details of open contracts as of September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration September 30, Trade Appreciation/
Contracts Type Date 1998 Date (Depreciation)
- -------------- ----------- ---------- ------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Long Positions:
10 Nikkei 300 Dec. 1998 $ 149,647 $156,898 $ (7,251)
------
------
</TABLE>
- ------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of Class Z shares of beneficial
interest at $.001 par value per share. Class Z shares are not subject to any
sales or redemption charges and are offered exclusively for sale to a limited
group of investors. Transactions in shares of beneficial interest for the fiscal
year ended September 30, 1998 and for the period September 24, 1997 through
September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Year ended September 30, 1998:
Shares sold........................................ 122,342
Shares issued in reinvestment of dividends......... 3,333
Shares reacquired.................................. (47,575)
---------
Net increase in shares outstanding................. 78,100
---------
---------
Period September 24, 1997* to
September 30, 1997:
Shares sold........................................ 2,500,020
---------
Net increase in shares outstanding................. 2,500,020
</TABLE>
- ---------------
* Commencement of investment operations.
As of September 30, 1998, 2,530,305 of the outstanding shares were owned by The
Prudential.
- --------------------------------------------------------------------------------
B-69
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Financial Highlights PRUDENTIAL PACIFIC INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 24, 1997(a)
September 30, Through
1998 September 30, 1997
------------- ----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................. $ 9.88 $ 10.00
------ ------
Income from investment operations
Net investment income(c)......................................................... 0.06 0.02
Net realized and unrealized loss on investment and foreign currency
transactions.................................................................. (3.55) (0.14)
------ ------
Total from investment operations.............................................. (3.49) (0.12)
------ ------
Less distributions
Dividends from net investment income............................................. (.01) --
------ ------
Net asset value, end of period................................................... $ 6.38 $ 9.88
------ ------
------ ------
TOTAL RETURN(d).................................................................. (35.54)% (1.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................................. $16,441 $ 24,699
Average net assets (000)......................................................... $19,827 $ 24,802
Ratios to average net assets: (c)
Expenses...................................................................... .60% .60%(b)
Net investment income......................................................... .78% 13.14%(b)
Portfolio turnover............................................................... 2% 0%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy.
(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 returns for periods of less than a
full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-70
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Report of Independent Accountants PRUDENTIAL PACIFIC INDEX FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
Prudential Index Series Fund--Prudential Pacific Index Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Index Series
Fund--Prudential Pacific Index Fund (the 'Fund', one of the portfolios
constituting Prudential Index Series Fund) at September 30, 1998, the results of
its operations for the year then ended and the changes in its net assets and the
financial highlights for the year then ended and for the period September 24,
1997 (commencement of operations) through September 30, 1997, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
B-71
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--93.0%
COMMON STOCKS--93.0%
- ------------------------------------------------------------
Advertising--1.1%
1,700 HA-LO Industries, Inc.(a) $ 49,725
2,900 True North Communications, Inc. 64,344
2,500 Valassis Communications, Inc. 100,000
-----------
214,069
- ------------------------------------------------------------
Aerospace--0.5%
1,400 BE Aerospace, Inc.(a) 30,800
2,400 Orbital Sciences Corp.(a) 67,350
1,400 Trimble Navigation, Ltd.(a) 14,088
-----------
112,238
- ------------------------------------------------------------
Airlines--0.8%
4,350 Comair Holdings, Inc. 125,062
1,800 Mesa Air Group, Inc.(a) 9,000
1,500 SkyWest, Inc. 28,688
-----------
162,750
- ------------------------------------------------------------
Automobiles & Trucks--1.1%
2,300 Breed Technologies, Inc. 14,088
1,100 Discount Auto Parts, Inc.(a) 26,469
4,600 Gentex Corp. 69,000
1,200 Simpson Industries, Inc. 12,075
1,450 Smith (A.O.) Corp. 28,456
800 Spartan Motors, Inc. 3,950
800 Standard Motor Products, Inc.
(Class 'A' Stock) 19,500
1,500 TBC Corp.(a) 9,000
1,400 Titan International, Inc. 15,575
1,500 Wabash National Corp. 22,125
-----------
220,238
- ------------------------------------------------------------
Banks and Savings & Loans--7.2%
1,800 Astoria Financial Corp.(a) 75,825
1,000 Banknorth Group, Inc. 29,250
1,100 Carolina First Corp. 24,338
1,300 CCB Financial Corp. $ 130,975
1,800 Centura Banks, Inc. 113,175
1,475 Commerce Bancorp, Inc. 58,355
3,800 Commercial Federal Corp.(a) 89,537
1,890 Downey Financial Corp. 45,006
4,200 First Merit Corp. 98,437
2,000 First Midwest Bancorp, Inc. 79,125
2,000 FirstBank Puerto Rico(a) 50,750
2,857 HUBCO, Inc. 72,496
600 JSB Financial, Inc. 30,788
3,400 Keystone Financial, Inc. 100,725
1,000 Premier Bancshares, Inc. 21,250
1,500 Queens County Savings Bank Corp. 40,125
2,000 Riggs National Corp. 49,000
1,300 Silicon Valley Bancshares 20,800
2,600 St. Paul Bancorp, Inc. 56,712
2,300 Susquehanna Bancshares, Inc. 43,413
1,500 Trustco Bank Corp. 40,219
2,600 United Bankshares, Inc. 67,112
2,800 UST Corp. 59,150
1,300 Whitney Holding Corp. 54,275
-----------
1,450,838
- ------------------------------------------------------------
Broadcasting--0.4%
1,200 Metro Networks, Inc.(a) 43,950
2,000 Westwood One, Inc.(a) 35,750
-----------
79,700
- ------------------------------------------------------------
Chemicals--1.8%
1,500 Cambrex Corp. 35,344
600 Chemed Corp. 16,838
1,200 Chemfirst, Inc.(a) 21,150
1,565 Enzo Biochem, Inc. 10,955
1,500 Geon Co. 26,625
1,500 Lilly Industries, Inc. (Class 'A'
Stock) 26,437
1,700 MacDermid, Inc. 51,425
1,000 Material Sciences Corp.(a) 8,750
700 McWhorter Technologies, Inc.(a) 14,131
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-72
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Chemicals (cont'd.)
1,700 Mississippi Chemical Corp.(a) $ 20,613
1,700 OM Group, Inc. 47,919
500 Penford Corp. 7,500
600 Quaker Chemical Corp. 9,375
1,200 Scotts Co. (Class 'A'Stock)(a) 36,750
1,000 WD 40 Co. 23,937
-----------
357,749
- ------------------------------------------------------------
Commercial Services--3.4%
1,750 AAR Corp. 34,344
1,300 ABM Industries, Inc. 38,025
1,500 ADVO, Inc. 36,656
2,100 Billing Concepts Corp. 29,400
2,400 Bowne & Co., Inc. 40,650
1,200 Catalina Marketing Corp.(a) 56,400
1,300 CDI Corp. 29,575
2,000 Central Parking Corp. 100,750
700 Central Vermont Public Service Corp. 7,569
900 Fair Issac & Co., Inc. 30,037
1,300 G & K Services, Inc. (Class 'A' Stock) 60,937
700 Insurance Auto Auctions, Inc.(a) 8,750
3,100 Interim Services, Inc.(a) 63,744
1,000 Merrill Corp. 15,687
1,300 NFO Worldwide, Inc.(a) 12,919
1,700 Norrell Corp. 25,500
1,600 Vantive Corp. 9,600
900 Volt Information Sciences, Inc.(a) 17,944
2,500 World Color Press, Inc.(a) 77,500
-----------
695,987
- ------------------------------------------------------------
Computer Services--6.6%
3,400 Acxiom Corp.(a) 84,362
2,800 American Management Systems, Inc.(a) 76,650
1,400 Analysts International Corp. 42,000
1,400 BancTec, Inc.(a) 19,950
1,950 Boole & Babbage, Inc.(a) 45,338
1,800 BISYS Group, Inc.(a) 79,425
2,200 Cerner Corp.(a) 58,987
3,000 Ciber, Inc. 60,562
800 Consolidated Graphics, Inc. 30,400
900 Customtracks Corp. $ 4,669
3,500 E Trade Group, Inc. 65,406
2,600 Harbinger Corp.(a) 18,850
1,300 Henry (Jack) & Associates, Inc. 62,075
1,700 HNC Software, Inc. 69,062
1,300 Hutchinson Technology, Inc. 22,263
2,045 Hyperion Software Corp. 44,351
2,600 Macromedia, Inc.(a) 42,250
1,200 Mercury Interactive Corp. 47,625
1,000 Micros Systems, Inc. 30,000
2,300 National Data Corp. 71,012
2,200 National Instruments Corp. 54,863
1,600 Platinum Software Corp.(a) 16,400
1,050 Progress Software Corp.(a) 27,169
3,100 Read-Rite Corp.(a) 24,219
1,200 Scott Technologies, Inc. 13,350
3,000 System Software Associates, Inc. 15,188
2,500 Technology Solutions Co. 28,125
1,000 Telxon Corp. 20,375
600 Wall Data, Inc.(a) 9,150
3,100 Whittman Hart, Inc. 56,962
2,800 Xylan Corp.(a) 37,100
1,600 Zebra Technologies Corp.
(Class 'A' Stock)(a) 53,600
-----------
1,331,738
- ------------------------------------------------------------
Computers--1.3%
1,600 Auspex System, Inc. 4,850
1,300 Computer Task Group, Inc. 38,106
900 Digi International, Inc. 11,025
1,400 Exabyte Corp.(a) 9,100
1,400 Gerber Scientific, Inc. 37,800
1,200 MicroAge, Inc.(a) 13,200
2,000 National Computer Systems, Inc. 59,000
1,400 Network Equipment Technologies, Inc. 14,000
1,000 Standard Microsystems Corp. 7,125
2,700 Vanstar Corp.(a) 26,663
1,400 Xircom, Inc. 34,300
-----------
255,169
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-73
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Construction--0.6%
500 Butler Manufacturing Co.(a) $ 11,563
1,700 Insituform Technologies, Inc.(a) 22,525
3,400 Morrison Knudsen Corp.
(Class 'A' Stock)(a) 36,550
900 Southern Energy Homes, Inc.(a) 6,300
1,900 Standard Pacific Corp. 26,837
800 Stone & Webster, Inc. 25,400
-----------
129,175
- ------------------------------------------------------------
Consumer Cyclical--2.1%
1,300 Barnes Group, Inc. 37,375
3,200 Champion Enterprises, Inc.(a) 74,400
3,400 D.R. Horton, Inc. 54,400
1,900 Eagle Hardware & Garden, Inc. 41,206
1,700 Justin Industries, Inc. 26,138
1,100 Manitowoc Co., Inc. 33,137
2,400 Mueller Industries, Inc.(a) 61,050
1,200 Myers Industries, Inc. 27,600
700 Republic Group, Inc. 9,319
1,100 Standard Products Co. 19,250
2,700 Wolverine World Wide, Inc. 29,362
1,200 Wynns International, Inc. 22,425
-----------
435,662
- ------------------------------------------------------------
Consumer Growth & Stable--1.3%
3,100 Bio-Technology General Corp.(a) 20,537
3,400 Caseys Gen Stores, Inc. 51,000
900 Cooper Companies, Inc. 15,863
4,500 DeVry, Inc.(a) 105,469
2,800 Dimon, Inc. 29,575
1,500 Franklin Covey Co. 29,344
1,000 Nelson Thomas, Inc. 12,750
-----------
264,538
- ------------------------------------------------------------
Containers & Packaging--0.5%
2,300 Aptargroup, Inc. 52,325
1,600 Caraustar Industries, Inc. 36,400
1,750 Shorewood Packaging Corp.(a) 23,625
-----------
112,350
- ------------------------------------------------------------
Cosmetics & Soaps--0.1%
1,200 Natures Sunshine Products, Inc. $ 19,200
900 USA Detergents, Inc.(a) 7,200
-----------
26,400
- ------------------------------------------------------------
Distribution/Wholesalers--0.6%
1,400 Applied Industrial Technologies, Inc. 22,838
3,300 Brightpoint, Inc. 25,369
900 Castle (A.M.) & Co. 13,556
300 Global Motorsport Group, Inc. 4,556
1,500 Hughes Supply, Inc. 42,750
700 Lawson Products, Inc. 15,400
500 Swiss Army Brands, Inc. 5,000
-----------
129,469
- ------------------------------------------------------------
Drugs & Medical Supplies--6.3%
1,200 ADAC Laboratories 28,800
2,500 Advanced Tissue Sciences, Inc.(a) 7,578
2,000 Alliance Pharmaceutical Corp. 6,125
1,700 Alpharma, Inc. (Class 'A'Stock) 44,625
1,900 Ballard Medical Products 38,119
1,400 Bindley Western Industries, Inc. 46,200
1,800 Cephalon, Inc.(a) 13,162
1,500 Coherent, Inc.(a) 14,016
1,500 COR Therapeutics, Inc.(a) 11,625
1,300 Cygnus, Inc.(a) 4,550
800 Hologic, Inc.(a) 10,400
2,500 IDEXX Laboratories, Inc.(a) 59,687
1,400 Immune Response Corp. 16,100
1,700 Incyte Pharmaceuticals, Inc.(a) 36,125
2,100 Invacare Corp. 49,350
1,900 Jones Pharmaceutical, Inc. 54,625
1,800 Medimmune, Inc.(a) 116,550
1,600 Mentor Corp. 18,200
1,100 Molecular Biosystems, Inc.(a) 4,675
4,400 NBTY, Inc.(a) 34,650
2,000 North American Vaccine, Inc.(a) 22,000
1,300 Noven Pharmaceuticals, Inc.(a) 5,850
2,100 Owens & Minor, Inc. 24,412
1,600 Parexel International Corp. 62,400
2,250 Patterson Dental Co.(a) 83,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-74
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Drugs & Medical Supplies (cont'd.)
1,600 Pharmaceutical Product Development,
Inc. $ 44,800
1,200 Protein Design Labs, Inc.(a) 28,800
2,000 Regeneron Pharmaceuticals, Inc.(a) 15,375
1,300 Resound Corp.(a) 5,525
2,100 Respironics, Inc.(a) 23,625
1,900 Roberts Pharmaceutical Corp. 36,337
3,500 Safeskin Corp.(a) 110,469
2,000 Sequus Pharmaceuticals, Inc.(a) 19,375
600 SpaceLabs Medical, Inc.(a) 9,300
2,000 Summit Technology, Inc.(a) 7,438
1,300 Sunrise Medical, Inc.(a) 13,000
700 Syncor International Corp.(a) 11,594
1,300 TheraTech, Inc.(a) 11,862
1,500 US Bioscience, Inc.(a) 10,688
1,600 Vertex Pharmaceuticals, Inc.(a) 36,800
1,000 VISX, Inc.(a) 67,000
800 Vital Signs, Inc. 13,250
-----------
1,278,312
- ------------------------------------------------------------
Electrical Equipment--3.1%
800 Analogic Corp. 27,600
3,100 Anixter International, Inc.(a) 48,244
1,500 Applied Magnetics Corp. 6,375
2,400 Baldor Electric Co. 52,500
1,700 Belden, Inc. 22,844
2,350 Burr-Brown Corp. 39,950
2,400 C-Cube Microsystems, Inc.(a) 42,000
2,600 Cognex Corp. 30,225
700 Electro Scientific Industries, Inc.(a) 11,113
1,200 Electroglas, Inc.(a) 10,425
1,500 Etec Systems, Inc.(a) 39,094
800 Hadco Corp.(a) 19,400
650 Harmon Industries, Inc. 14,300
1,400 Helix Technology Corp. 13,825
900 Innovex, Inc. 10,913
1,200 Juno Lighting, Inc. 26,850
2,500 KEMET Corp.(a) 27,812
1,700 Kent Electronics Corp.(a) 17,000
3,300 Komag, Inc.(a) 10,106
1,100 Kuhlman Corp. 35,681
1,500 Kulicke & Soffa Industries, Inc.(a) $ 20,437
2,200 Novellus Systems, Inc. 57,750
1,000 Technitrol, Inc. 20,000
1,500 Valence Technology, Inc.(a) 6,375
2,700 Vicor Corp.(a) 22,106
-----------
632,925
- ------------------------------------------------------------
Electronics--3.3%
800 Alliant Techsystems, Inc. 53,000
600 Bell Industries, Inc. 7,163
700 Benchmark Electronics, Inc.(a) 15,969
1,700 BMC Industries, Inc. 10,200
1,850 Cable Design Technologies Corp.(a) 23,587
2,100 Checkpoint Systems, Inc. 18,244
900 CTS Corp. 26,550
1,900 Dallas Semiconductor Corp. 51,300
2,900 Digital Microwave Corp. 8,881
1,400 Dionex Corp.(a) 32,550
1,300 Envoy Corp. 28,437
2,000 Filenet Corp. 28,000
1,300 Harman International Industries, Inc. 47,694
800 Integrated Circuit Systems, Inc.(a) 7,975
900 Itron, Inc.(a) 5,963
1,100 Marshall Industries(a) 24,269
2,200 Methode Eletronics, Inc. (Class 'A'
Stock) 33,000
700 Park Electrochemical Corp. 9,537
1,500 Photronics, Inc.(a) 19,125
1,700 Pioneer-Standard Electronics, Inc. 10,731
900 Plexus Corp.(a) 17,437
3,200 S3, Inc.(a) 9,200
2,700 Sanmina Corp.(a) 75,937
1,000 SpeedFam International, Inc.(a) 10,750
500 Three-Five Systems, Inc.(a) 3,594
1,300 Ultratech Stepper, Inc.(a) 19,744
2,000 Unitrode Corp.(a) 21,250
2,900 VLSI Technology, Inc.(a) 22,112
500 Watkins Johnson Co. 9,313
700 Whittaker Corp. 10,369
1,300 X-Rite, Inc. 13,000
-----------
674,881
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-75
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Environmental Services--0.2%
1,100 Dames & Moore, Inc. $ 11,550
1,000 Ionics, Inc.(a) 26,500
900 TETRA Technologies, Inc.(a) 10,800
-----------
48,850
- ------------------------------------------------------------
Exploration & Production--0.3%
2,400 Newfield Exploration Co.(a) 54,000
- ------------------------------------------------------------
Financial Services--4.4%
2,100 Americredit Corp. 51,188
2,100 Capital Resources Corp. 57,487
1,500 CMAC Investment Corp. 65,250
1,500 Cullen/Frost Bankers, Inc. 72,375
800 Dain Rauscher Corp. 25,200
1,300 Delphi Financial Group, Inc.(a) 51,188
2,400 Eaton Vance Corp. 55,350
1,100 Gallagher (Arthur J.) & Co. 45,375
3,600 Legg Mason, Inc. 94,725
1,800 Orion Capital Corp. 64,237
1,600 Pioneer Group, Inc. 26,400
1,478 Primark Corp.(a) 45,079
3,150 Raymond James Financial, Inc. 66,150
1,200 SEI Investments Corp. 83,400
1,200 U.S. Trust Corp. 79,650
-----------
883,054
- ------------------------------------------------------------
Food & Beverage--2.3%
1,300 Canandaigua Wine, Inc.
(Class 'A' Stock)(a) 51,350
4,200 Chiquita Brands International, Inc. 44,363
500 Coca-Cola Bottling Co. 30,000
2,700 Earthgrains Co. 83,531
2,400 Fleming, Inc. 29,400
600 J & J Snack Foods Corp.(a) 11,100
700 Nash-Finch Co. 10,281
2,100 Ralcorp Holdings, Inc. 29,400
3,200 Richfood Holdings, Inc. 49,200
2,500 Smithfield Foods, Inc.(a) 44,219
1,800 Whole Foods Market, Inc. 75,825
-----------
458,669
- ------------------------------------------------------------
Forest Products--0.1%
900 Pope & Talbot, Inc. $ 8,775
1,300 Universal Forest Products, Inc. 20,638
-----------
29,413
- ------------------------------------------------------------
Furniture--1.4%
800 Bassett Furniture Industries, Inc. 23,400
700 Dixie Group, Inc. 4,550
2,000 Ethan Allen Interiors, Inc.(a) 72,500
3,400 La-Z-Boy, Inc. 66,725
3,400 Mohawk Industries, Inc.(a) 93,075
1,000 Thomas Industries, Inc. 21,437
-----------
281,687
- ------------------------------------------------------------
Health Care--2.1%
1,500 Access Health, Inc. 55,312
2,000 American Oncology Resources, Inc. 20,250
3,700 Coventry Healthcare, Inc.(a) 24,513
800 Curative Health Services, Inc. 24,500
1,000 Datascope Corp. 22,125
900 Diagnostic Products Corp. 24,019
700 Hauser, Inc. 2,800
2,954 Integrated Health Services, Inc. 49,664
2,400 Liposome Co., Inc.(a) 13,650
2,000 Magellan Health Services, Inc. 21,625
1,200 NCS Healthcare, Inc. 21,150
800 Pharmaceutical Marketing Services 7,200
2,700 Renal Care Group, Inc.(a) 69,187
1,700 Sierra Health Services, Inc.(a) 33,469
1,600 Sola International, Inc.(a) 28,700
-----------
418,164
- ------------------------------------------------------------
Hospitals/Hospital Management--1.5%
2,200 Genesis Health Ventures, Inc.(a) 26,950
4,512 Mariner Post-Acute Network, Inc. 23,124
1,100 Marquette Medical Systems, Inc. 47,781
3,100 Orthodontic Centers of America, Inc.(a) 51,731
1,000 Pediatrix Medical Group, Inc.(a) 44,875
4,300 PhyCor, Inc.(a) 21,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Hospitals/Hospital Management (cont'd.)
2,100 Universal Health Services, Inc.
(Class 'B' Stock)(a) $ 87,675
-----------
303,636
- ------------------------------------------------------------
Housing Related--0.9%
2,500 Fedders USA, Corp. 12,813
1,100 M.D.C. Holdings, Inc. 20,281
500 National Presto Industries, Inc. 18,750
1,100 Oak Industries, Inc. 29,700
3,000 Oakwood Homes Corp. 39,375
900 Ryland Group, Inc. 21,937
600 Skyline Corp. 17,400
700 U.S. Home Corp. 20,563
-----------
180,819
- ------------------------------------------------------------
Insurance--5.2%
2,100 Allied Group, Inc. 100,931
2,700 American Bankers Insurance Group, Inc. 114,750
2,700 AMRESCO, Inc. 20,250
600 Compdent Corp.(a) 8,175
2,400 Enhance Financial Services Group, Inc. 70,950
700 Executive Risk, Inc. 31,544
1,580 Fidelity National Financial, Inc. 53,424
3,500 First American Financial Corp. 112,000
2,300 Fremont General Corp. 110,400
2,400 Frontier Insurance Group, Inc. 31,800
700 Galey & Lord, Inc. 8,356
800 Hilb, Rogal & Hamilton Co. 15,100
1,100 Life Resources Corp. 101,131
2,600 Mutual Risk Management Ltd. 91,975
1,200 NAC RE Corp. 59,100
1,200 Protective Life Corp. 43,200
1,900 Selective Insurance Group, Inc. 36,337
700 Trenwick Group, Inc. 20,388
1,100 Zenith National Insurance Corp. 27,569
-----------
1,057,380
- ------------------------------------------------------------
Leisure--1.9%
1,800 Arctic Cat, Inc. $ 16,087
2,900 Aztar Corp.(a) 11,238
700 Carmike Cinemas, Inc. (Class 'A'
Stock)(a) 12,863
1,600 Family Golf Centers, Inc.(a) 28,400
1,100 Galoob Toys, Inc.(a) 12,513
500 GC Companies, Inc.(a) 19,312
2,700 Grand Casinos, Inc.(a) 21,431
1,700 Hollywood Park, Inc.(a) 17,637
800 Huffy Corp. 11,300
1,000 K2, Inc.(a) 17,687
1,950 Marcus Corp. 30,225
2,436 Midway Games, Inc. 28,471
2,000 Players International, Inc.(a) 9,500
1,800 Polaris Industries, Inc. 55,800
1,800 Primadonna Resorts, Inc. 13,838
3,400 Prime Hospitality Corp.(a) 23,800
1,700 Sturm Ruger & Co., Inc. 26,562
750 Thor Industries, Inc. 15,938
1,500 Winnebago Industries, Inc. 16,875
-----------
389,477
- ------------------------------------------------------------
Machinery--1.9%
2,495 Applied Power, Inc. (Class 'A' Stock) 68,145
600 Astec Industries, Inc.(a) 25,575
900 Flow International Corp.(a) 8,325
1,400 Graco, Inc. 32,550
1,800 Halter Marine Group, Inc. 20,475
2,900 JLG Industries, Inc. 46,219
900 Lindsay Manufacturing Co.(a) 13,387
3,200 Paxar Corp. 28,400
1,300 Regal Beloit Corp. 28,925
600 Rival Co. 4,800
700 Robbins & Myers, Inc. 14,831
2,000 Roper Industries, Inc. 34,750
1,400 Royal Appliance Manufacturing Co.(a) 5,425
800 SPX Corp. 33,050
800 Toro Co. 16,550
-----------
381,407
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-77
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Metals - Ferrous--0.4%
700 Acme Metals, Inc.(a) $ 1,706
1,800 Birmingham Steel Corp. 14,288
900 Commercial Metals Co. 20,700
1,500 Northwestern Steel & Wire Co.(a) 2,953
900 Quanex Corp. 17,831
800 Steel Technologies, Inc. 5,800
1,200 WHX Corp.(a) 15,450
-----------
78,728
- ------------------------------------------------------------
Metals - Nonferrous--0.3%
600 Amcast Industrial Corp. 8,813
1,800 AMCOL International Corp. 20,475
1,000 Commonwealth Industries, Inc. 8,125
3,500 Hecla Mining Co.(a) 17,719
1,100 IMCO Recycling, Inc.(a) 15,606
-----------
70,738
- ------------------------------------------------------------
Mineral Resources--1.9%
2,300 Dekalb Genetics Corp. 211,600
2,466 Delta & Pine Land Co. 108,504
900 Dravo Corp. 11,362
500 Kronos, Inc.(a) 18,500
700 Lone Star Industries, Inc. 41,825
-----------
391,791
- ------------------------------------------------------------
Miscellaneous Basic Industry--3.1%
1,800 Apogee Enterprises, Inc. 22,050
2,500 Blount International, Inc.
(Class 'A' Stock) 59,375
1,500 Clarcor, Inc. 23,063
2,300 Corn Products International, Inc. 58,075
600 CPI Corp. 14,212
1,000 Gibson Greetings, Inc.(a) 20,313
1,400 Global Industrial Technologies, Inc. 9,800
1,900 Griffon Corp.(a) 16,625
500 Insteel Industries, Inc. 2,406
3,400 Interface, Inc. 40,800
816 Intermagnetics General Corp. 5,712
1,600 Intermet Corp.(a) 20,300
1,500 Kaman Corp. 25,687
800 LSB Industies, Inc. $ 2,700
1,000 Lydall, Inc.(a) 10,250
1,000 O'Sullivan Corp. 8,500
1,400 Pre Paid Legal Services, Inc. 35,787
800 SPS Technologies, Inc.(a) 37,250
800 Standex International Corp. 19,100
1,800 Superior Services, Inc. 50,737
1,400 Texas Industries, Inc. 35,175
2,400 Tredegar Industries, Inc. 43,950
1,800 Valmont Industries, Inc. 22,050
600 Walbro Corp. 4,838
1,400 Watsco, Inc. 21,000
900 Wolverine Tube, Inc.(a) 18,956
-----------
628,711
- ------------------------------------------------------------
Office Equipment & Supplies--0.3%
2,000 John H. Harland Co. 27,125
400 Nashua Corp. 5,900
900 New England Business Service, Inc. 27,844
-----------
60,869
- ------------------------------------------------------------
Oil & Gas--1.7%
1,900 Benton Oil & Gas Co.(a) 10,806
1,600 Cabot Oil & Gas Corp. (Class 'A' Stock) 24,400
700 Cascade Natural Gas Corp. 11,550
1,000 Cross (A.T.) Co. (Class 'A' Stock) 7,125
2,900 Cross Timbers Oil Co. 43,681
1,200 HS Resources, Inc. 13,725
1,700 Northwest Natural Gas Co. 47,016
6,700 Santa Fe Energy Resources, Inc.(a) 63,231
2,100 Snyder Oil Corp. 33,469
2,000 Southwest Gas Corp. 40,875
3,300 Vintage Petroleum, Inc. 37,950
600 Wiser Oil Co. 3,188
-----------
337,016
- ------------------------------------------------------------
Oil & Gas Services--1.8%
2,100 Barrett Resources Corp.(a) 42,394
1,100 Daniel Industries, Inc. 15,056
2,100 Devon Energy Corp. 69,169
2,800 Input/Output, Inc.(a) 22,225
1,400 Oceaneering International, Inc.(a) 19,950
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-78
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Oil & Gas Services (cont'd.)
1,400 Offshore Logistics, Inc.(a) $ 17,675
600 Pennsylvania Enterprises, Inc. 15,000
1,100 Plains Resources, Inc.(a) 18,562
2,500 Pogo Producing Co. 37,344
1,300 Pool Energy Services Co.(a) 11,863
3,200 Pride International, Inc. 25,600
1,300 Remington Oil And Gas Corp.
(Class 'B' Stock)(a) 5,606
1,400 Seitel, Inc.(a) 15,137
1,600 Southwestern Energy Co. 13,600
700 St. Mary Land & Exploration Co. 16,712
3,000 Tuboscope Vetco International, Inc.(a) 34,875
-----------
380,768
- ------------------------------------------------------------
Paper and Related Products--0.5%
1,400 Brady (W.H.) Co. (Class 'A' Stock) 29,050
2,400 Buckeye Technologies, Inc.(a) 43,350
1,000 Schweitzer-Mauduit International, Inc. 21,750
-----------
94,150
- ------------------------------------------------------------
Precious Metals--0.5%
1,400 Coeur d'Alene Mines Corp. 10,238
1,900 Getchell Gold Corp.(a) 40,019
2,000 Glamis Gold Ltd. 5,125
1,300 Stillwater Mining Co.(a) 41,031
-----------
96,413
- ------------------------------------------------------------
Real Estate - Developers--0.3%
2,500 Toll Brothers, Inc.(a) 57,344
- ------------------------------------------------------------
Restaurants--2.2%
2,000 Applebee's International, Inc. 41,750
800 Au Bon Pain Co., Inc.
(Class 'A' Stock)(a) 4,875
1,200 CEC Entertainment, Inc. 24,300
1,300 Cheesecake Factory, Inc.(a) 20,150
3,150 CKE Restaurants, Inc. 93,712
1,325 Consolidated Products, Inc. 23,270
2,500 Foodmaker, Inc.(a) 39,219
600 IHOP Corp. $ 22,125
1,900 Landry's Seafood Restaurants, Inc. 12,825
1,500 Luby's Cafeterias, Inc. 24,188
2,100 Ruby Tuesday, Inc.(a) 31,762
2,800 Ryan's Family Steak Houses, Inc.(a) 33,425
3,100 Shoney's, Inc. 5,813
1,200 Sonic Corp.(a) 21,000
100 Taco Cabana, Inc.(a) 606
1,500 TCBY Enterprises, Inc. 9,188
1,900 TriArc Companies, Inc.
(Class 'A' Stock)(a) 29,569
-----------
437,777
- ------------------------------------------------------------
Retail--5.0%
1,700 AnnTaylor Stores Corp.(a) 34,531
2,400 Bombay Company, Inc.(a) 12,750
1,100 Books-A-Million, Inc.(a) 2,819
1,100 Brown Group, Inc. 16,913
800 Building Materials Holdings Corp.(a) 10,500
1,500 Cash America International, Inc. 16,688
1,700 Cato Corp. (Class 'A' Stock) 19,762
500 Damark International, Inc.
(Class 'A' Stock)(a) 3,625
1,500 Dress Barn, Inc.(a) 18,187
1,100 Express Scripts, Inc. (Class 'A' Stock) 90,475
1,300 Filene's Basement Corp.(a) 2,275
1,700 Footstar, Inc.(a) 38,569
2,200 Goody's Family Clothing, Inc. 26,400
700 Gottschalks, Inc.(a) 5,119
1,300 Hancock Fabrics, Inc. 12,513
900 J. Baker, Inc.(a) 4,050
1,800 Jan Bell Marketing, Inc. 11,700
1,200 Jo Ann Stores, Inc. 26,700
1,900 Just For Feet, Inc. 24,225
300 K-Swiss, Inc. (Class 'A' Stock) 6,975
1,100 Lechters, Inc.(a) 3,781
600 Lillian Vernon Corp. 8,138
2,600 Linens N Things, Inc. 71,500
2,000 Michaels Stores, Inc.(a) 51,000
1,400 O'Reilly Automotive, Inc.(a) 50,750
245 Payless Cashways, Inc. 260
6,600 Pier 1 Imports, Inc. 49,500
1,600 Regis Corp. 50,400
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-79
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Retail (cont'd.)
1,400 Russ Berrie & Co., Inc. $ 26,687
1,700 Shopko Stores, Inc. 55,250
2,000 Sports Authority, Inc. 15,250
2,900 Stein Mart, Inc.(a) 23,200
3,000 Stride Rite Corp. 24,562
2,200 The Men's Wearhouse, Inc. 37,950
700 Timberland Co. (Class 'A' Stock) 25,550
3,600 Williams-Sonoma, Inc.(a) 76,725
2,400 Zale Corp. 61,500
-----------
1,016,779
- ------------------------------------------------------------
Telecommunications--2.9%
1,700 Allen Telecom, Inc.(a) 11,369
3,400 Aspect Telecommunications Corp.(a) 81,600
1,600 Avid Technology, Inc.(a) 38,100
800 BroadBand Technologies, Inc.(a) 2,250
600 C-Cor Electronics, Inc. 7,725
1,000 California Microwave, Inc.(a) 8,250
500 Centigram Communications Corp.(a) 3,938
3,100 Commscope, Inc. 35,844
1,000 Dialogic Corp. 27,875
3,000 General Communication, Inc.(a) 11,062
2,300 General Semiconductor, Inc. 13,800
1,700 Intermediate Telephone, Inc. 21,994
3,200 International Rectifier Corp.(a) 16,400
900 InterVoice, Inc.(a) 20,644
1,500 Lattice Semiconductor Corp.(a) 37,125
917 Nova Corp. 28,125
2,700 P-COM, Inc.(a) 10,547
2,400 Picturetel Corp.(a) 15,450
1,000 Symmetricom, Inc.(a) 5,250
1,400 TCSI Corp.(a) 4,069
4,200 Tele-Save Holdings, Inc. 46,987
1,100 TJ International, Inc. 20,625
4,700 Vitesse Semiconductor Corp.(a) 111,037
-----------
580,066
- ------------------------------------------------------------
Textiles--1.6%
600 Angelica Corp. 9,638
900 Ashworth, Inc.(a) 6,075
1,400 Authentic Fitness Corp. $ 21,350
1,700 Cone Mills Corp.(a) 8,500
900 Cyrk, Inc. 9,450
1,600 Delta Woodside Industries, Inc. 6,300
1,600 Guilford Mills, Inc. 23,800
1,600 Gymboree Corp.(a) 12,000
500 Haggar Corp. 5,500
2,200 Hartmarx Corp.(a) 14,438
700 Johnston Industies, Inc. 2,231
1,400 Kellwood Co. 37,625
2,700 Nautica Enterprises, Inc.(a) 50,456
1,200 Oshkosh B'Gosh, Inc. (Class 'A' Stock) 24,900
600 Oxford Industries, Inc. 18,450
1,700 Phillips-Van Heusen Corp. 16,150
934 Pillowtex Corp. 27,436
1,100 St. John Knits, Inc. 17,737
1,900 Tultex Corp. 3,325
-----------
315,361
- ------------------------------------------------------------
Transportation/Trucking/Shipping--1.9%
2,200 Air Express International Corp. 35,200
2,000 American Freightways, Inc. 15,000
1,200 Arkansas Best Corp. 6,900
1,600 Expeditors International of Washington,
Inc. 44,400
2,300 Fritz Companies, Inc. 15,669
1,100 Frozen Food Express Industries, Inc. 7,425
1,900 Heartland Express, Inc.(a) 31,350
1,300 Kirby Corp.(a) 27,300
700 Landstar Systems, Inc.(a) 19,731
800 M.S. Carriers, Inc.(a) 15,900
1,300 Pittston Burlington Group 9,669
600 Railtex, Inc. 7,050
3,900 Rollins Truck Leasing Corp. 43,631
900 Rural/Metro Corp. 7,200
1,700 USFreightways Corp. 33,787
3,125 Werner Enterprises, Inc. 49,219
1,700 Yellow Corp. (b) 22,950
-----------
392,381
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-80
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL SMALL-CAP INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utilities - Electric--4.1%
500 Aquarion Co. $ 16,844
2,000 Atmos Energy Corp. 57,125
500 Bangor Hydro-Electric Co.(a) 4,875
1,200 Central Hudson Gas & Electric Co. 50,250
900 CILCORP, Inc. 47,194
1,400 Commonwealth Energy Systems 50,925
600 Connecticut Energy Corp. 16,200
600 Consumers Water Co. 17,100
1,300 Eastern Utilities Associates 33,963
1,800 Energen Corp. 34,200
300 Green Mountain Power Corp. 3,431
1,900 KCS Energy, Inc. 9,738
1,300 New Jersey Resources Corp. 46,312
900 Orange & Rockland Utilities, Inc. 49,387
1,800 Philadelphia Suburban Corp. 48,262
2,000 Piedmont Natural Gas, Inc. 67,750
1,300 Public Service Co., Inc. 30,063
2,000 Sierra Pacific Resources 77,625
900 The United Illuminating Co. 47,025
800 TNP Enterprises, Inc. 27,950
2,400 United Water Resources, Inc. 40,800
2,400 Wicor, Inc. 57,300
-----------
834,319
- ------------------------------------------------------------
Utilities - Water--0.1%
600 American States Water Co. 15,900
-----------
Total long-term investments
(cost $23,886,281) 18,839,855
SHORT-TERM INVESTMENTS--6.4%
- ------------------------------------------------------------
U.S. GOVERNMENT SECURITY--0.5%
$100 United States Treasury Bill,
4.66%, 12/17/98(b)
(cost $99,003) $ 99,003
- ------------------------------------------------------------
REPURCHASE AGREEMENT--5.9%
1,186 Joint Repurchase Agreement Account,
5.52%, 10/1/98 (Note 5)
(cost $1,186,000) 1,186,000
-----------
Total short-term investments
(cost $1,285,003) 1,285,003
- ------------------------------------------------------------
Total Investments--99.4%
(cost $25,171,283; Note 4) 20,124,858
Other assets in excess of
liabilities--0.6% 130,829
-----------
Net Assets--100% $20,255,687
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-81
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Statement of Assets and Liabilities PRUDENTIAL SMALL-CAP INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $25,171,283)................................................................ $ 20,124,858
Cash.................................................................................................... 229
Receivable for investments sold......................................................................... 167,455
Receivable from Manager................................................................................. 132,136
Receivable for Fund shares sold......................................................................... 28,616
Dividends and interest receivable....................................................................... 11,222
Other assets............................................................................................ 276
------------------
Total assets......................................................................................... 20,464,792
------------------
Liabilities
Accrued expenses and other liabilities.................................................................. 93,461
Payable for investments purchased....................................................................... 71,596
Due to broker-variation margin.......................................................................... 28,345
Payable for Fund shares repurchased..................................................................... 15,703
------------------
Total liabilities.................................................................................... 209,105
------------------
Net Assets.............................................................................................. $ 20,255,687
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................ $ 25,023
Paid-in capital in excess of par..................................................................... 24,794,115
------------------
24,819,138
Undistributed net investment income.................................................................. 96,778
Accumulated net realized gain on investments......................................................... 389,346
Net unrealized depreciation on investments........................................................... (5,049,575)
------------------
Net assets, September 30, 1998.......................................................................... $ 20,255,687
------------------
------------------
Net asset value per share
($20,255,687 / 2,502,249 shares of beneficial interest issued and outstanding)....................... $8.09
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-82
<PAGE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Through
Net Investment Income September 30, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes
of $53)............................ $ 174,189
Interest.............................. 47,417
------------------
Total income....................... 221,606
------------------
Expenses
Management fee........................ 67,841
Custodian's fees and expenses......... 156,000
Registration fees..................... 39,000
Reports to shareholders............... 40,000
Legal fees............................ 20,000
Amortization of organization
expense............................ 19,620
Audit fees............................ 18,000
Transfer agent's fees and expenses.... 11,000
Trustees' fees........................ 7,000
Miscellaneous......................... 2,643
------------------
Total operating expenses........... 381,104
Less: Expense subsidy (Note 2)........... (268,030)
------------------
Net expenses....................... 113,074
------------------
Net investment income.................... 108,532
------------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............... 542,275
Financial futures contracts........... (152,929)
------------------
389,346
------------------
Net change in unrealized depreciation on:
Investments........................... (5,046,425)
Financial futures contracts........... (3,150)
------------------
Net loss on investments.................. (5,049,575)
------------------
Net Decrease in Net Assets
Resulting from Operations................ $ (4,551,697)
------------------
------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
Increase in Through
Net Assets September 30, 1998
<S> <C>
Operations
Net investment income.................. $ 108,532
Net realized gain on investment
transactions........................ 389,346
Net change in unrealized
depreciation on investments......... (5,049,575)
------------------
Net decrease in net assets resulting
from operations..................... (4,551,697)
------------------
Dividends and distributions (Note 1):
Dividends to shareholders from net
investment income................... (31,374)
------------------
Fund share transactions (Note 6):
Net proceeds from shares sold.......... 28,670,830
Net asset value of shares issued to
shareholders in reinvestment of
distributions....................... 31,360
Cost of shares reacquired.............. (3,863,432)
------------------
Net increase in net assets from
Fund share transactions............. 24,838,758
------------------
Net increase.............................. 20,255,687
------------------
Net Assets
Beginning of period....................... --
------------------
End of period(b).......................... $ 20,255,687
------------------
------------------
- ---------------
(a) Commencement of investment
operations.
(b) Includes undistributed net
investment income of................ $ 77,158
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-83
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL SMALL-CAP INDEX FUND
- --------------------------------------------------------------------------------
The Prudential Index Series 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 five separate funds (the 'Funds'). Prudential
Small-Cap Index Fund (the 'Fund') commenced investment operations on October 1,
1997 when 1,860,203 shares of beneficial interest of the Fund were sold for
$18,602,031 to The Prudential Insurance Company of America ('The Prudential').
The Fund's investment objective is to provide investment results that correspond
to the price and yield performance of a broad-based index of small cap stocks.
The Fund currently uses the Standard & Poor's 600 Small Capitalization Stock
Price Index price for that purpose.
- ------------------------------------------------------------
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 or Nasdaq are valued at the
last sale price on such exchange or board of trade on the date of valuation or,
if there were no sales on such day, at the mean between the closing bid and
asked prices quoted on such day or at the bid price in the absence of an asked
price.
Securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued by a principal market maker or independent pricing
agent.
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
methodology or provides a valuation or methodology that, in the judgment of the
subadviser does not represent fair value, are 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 under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Net 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 or commodities 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 or commodity. 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 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 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.
Federal Income Taxes: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies
- --------------------------------------------------------------------------------
B-84
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL SMALL-CAP INDEX FUND
- --------------------------------------------------------------------------------
and to distribute all of its taxable net investment income and net capital
gains, if any, 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 Offering Expenses: Approximately $19,600 of costs were incurred in
connection with the offering and initial registration of the Fund and have been
deferred and are being amortized ratably over a period of twelve months from the
date each of the Funds commenced investment operations. At September 30, 1998,
deferred offering expenses were fully amortized.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income by $19,620 and decrease paid-in capital in excess of par by $19,620. Net
realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investment Fund Management
LLC ('PIFM' or the 'Manager'.) Pursuant to this agreement PIFM has
responsibility for all investment advisory services. PIFM has entered into a
subadvisory agreement with The Prudential Investment Corporation ('PIC'). PIC,
subject to the supervision of PIFM, manages the assets of the Fund in accordance
with its investment objective and policies. PIFM 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. The
management fee paid to PIFM is computed daily and payable monthly at an annual
rate of .30 of 1% of the Fund's average daily net assets.
PIFM has agreed to reimburse the Fund so that total operating expenses do not
exceed .50% of the average net assets of the Fund for the fiscal year ending
September 30, 1998. This voluntary waiver may be terminated at any time without
notice. For the period ended September 30, 1998, PIFM subsidized $268,030 for
the expenses of the Fund (1.18% of the average net assets of the Fund/$.11 per
share.)
Prudential Securities Incorporated ('PSI') acted as the distributor of the
Fund's shares through May 31, 1998. Prudential Investment Management Services
('PIMS') became the distributor of the Fund effective June 1, 1998 and is
serving under the same terms and conditions as under the agreement with PSI.
Under the distribution agreement, PSI and PIMS incurred the expenses of
distributing the Fund's shares, none of which is reimbursed or paid for by the
Fund.
PIC, PIFM, PIMS and PSI are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement during the period
ended September 30, 1998. The funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the funds. The Agreement
expires on December 29, 1998.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1998,
the Fund incurred fees of approximately $3,000 for the services of PMFS. As of
September 30, 1998, approximately $500 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1998 aggregated $35,189,048 and $11,302,768,
respectively.
On September 30, 1998, the Fund held one purchased financial futures contract on
the S&P Midcap 400 Index expiring December 30, 1998. The cost of such contract
was $1,247,950. The value of the contract on September 30, 1998 was $1,244,800,
thereby resulting in an unrealized loss of $3,150.
The cost basis of investments for federal income tax purposes is $25,171,284
and, accordingly, as of September 30, 1998, net unrealized appreciation for
federal income tax purposes was $5,046,425 (gross unrealized
appreciation--$1,222,048; gross unrealized depreciation--$6,268,473).
- --------------------------------------------------------------------------------
B-85
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL SMALL-CAP INDEX FUND
- --------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of September 30, 1998, the
Fund had a .161% undivided interest in the repurchase agreements in the joint
account. The undivided interest represented $1,186,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the collateral
therefor was as follows:
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
Bear Stearns & Co., 5.58%, in the principal amount of $210,000,000, repurchase
price $210,032,550, due 10/1/98. The value of the collateral including accrued
interest was $214,893,617.
Goldman, Sachs & Co., 5.45%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 10/1/98. The value of the collateral including accrued
interest was $214,200,293.
Warburg Dillon Read LLC, 5.52%, in the principal amount of $210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the collateral
including accrued interest was $214,255,819.
- ------------------------------------------------------------
Note 6. Capital
The Series offers Class Z shares. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value. Transactions in shares of beneficial interest during the year
ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Class Z Shares
- ------------------------------------------------- ---------
<S> <C>
Shares sold...................................... 2,895,380
Shares issued in reinvestment of dividends and
distributions.................................. 3,379
Shares reacquired................................ (396,510)
---------
Net increase in shares outstanding............... 2,502,249
---------
---------
</TABLE>
Of the total shares outstanding on September 30, 1998, PIFM and affiliates owned
1,898,856 shares of the Fund.
- --------------------------------------------------------------------------------
B-86
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Financial Highlights PRUDENTIAL SMALL-CAP INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1997(a)
through
September 30, 1998
---------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................................................................... $ 10.00
------
Income from investment operations
Net investment income (b)................................................................................ .04
Net realized and unrealized gain (loss) on investments................................................... (1.94)
------
Total from investment operations...................................................................... (1.90)
------
Less distributions:
Dividends from net investment income..................................................................... (.01)
------
Net asset value, end of year............................................................................. $ 8.09
------
------
TOTAL RETURN(c):......................................................................................... (18.98)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................................................ $20,256
Average net assets (000)................................................................................. $22,676
Ratios to average net assets: (b)
Expenses.............................................................................................. .50%
Net investment income................................................................................. .48%
Portfolio turnover....................................................................................... 52%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total return includes the effect of expense
subsidies.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-87
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Report of Independent Accountants PRUDENTIAL SMALL-CAP INDEX FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Index Series Fund--Prudential Small-Cap Index Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Index Series
Fund--Prudential Small-Cap Index Fund (the 'Fund,' one of the portfolios
constituting Prudential Index Series Fund) at September 30, 1998 and the results
of its operations, the changes in its net assets and the financial highlights
for the period October 1, 1997 (commencement of operations) through September
30, 1998, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
B-88
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.8%
COMMON STOCKS--97.8%
- ------------------------------------------------------------
Aerospace/Defense--1.6%
3,325 Aeroquip-Vickers, Inc. $ 95,594
68,724 Allied Signal, Inc. 2,431,111
123,584 Boeing Co. 4,240,476
15,106 General Dynamics Corp. 758,132
24,278 Lockheed Martin Corp. 2,447,526
8,120 Northrop Grumman Corp. 592,760
41,544 Raytheon Co. 2,240,779
24,663 Rockwell International Corp. 890,951
28,360 United Technologies Corp. 2,167,768
--------------
15,865,097
- ------------------------------------------------------------
Airlines--0.4%
22,149 AMR Corp.(a) 1,227,885
9,242 Delta Airlines, Inc. 898,784
41,322 Southwest Airlines Co. 826,440
12,521 USAir Group, Inc.(a) 633,876
--------------
3,586,985
- ------------------------------------------------------------
Aluminum--0.3%
28,529 Alcan Aluminum Ltd. 668,649
22,916 Aluminum Co. of America 1,627,036
8,836 Reynolds Metals Co. 448,979
--------------
2,744,664
- ------------------------------------------------------------
Automobiles & Trucks--1.7%
78,533 Chrysler Corp. 3,759,767
4,579 Cummins Engine Co., Inc. 136,225
20,140 Dana Corp. 751,474
147,989 Ford Motor Co. 6,946,234
81,778 General Motors Corp. 4,472,234
22,699 Genuine Parts Co. 682,389
10,576 Johnson Controls, Inc. 491,784
8,760 Navistar International Corp.(a) 198,195
--------------
17,438,302
Banking--7.4%
42,793 Associates First Capital Corp. $ 2,792,243
86,194 Banc One Corp. 3,674,019
35,828 BankBoston Corp. 1,182,324
91,336 Bank of New York Co., Inc. 2,500,323
84,194 BankAmerica Corp. 5,062,164
11,877 Bankers Trust Corp. 700,743
7,989 Capital One Financial 826,861
105,084 Chase Manhattan Corp. 4,544,883
55,208 Citicorp 5,130,893
19,161 Comerica, Inc. 1,050,262
33,064 Fifth Third Bancorp 1,901,180
35,631 First Chicago Corp. 2,440,724
118,649 First Union Corp. 6,073,346
34,572 Fleet Financial Group, Inc. 2,538,881
6,964 Golden West Financial Corp. 569,742
14,955 H.F. Ahmanson & Co. 830,003
25,410 Huntington Bancshares, Inc. 638,426
21,690 J.P. Morgan & Co., Inc. 1,835,516
53,535 KeyCorp 1,545,823
32,273 Mellon Bank Corp. 1,777,032
19,086 Mercantile Bancorporation, Inc. 923,285
40,749 National City Corp. 2,686,887
116,894 NationsBank Corp. 6,253,829
13,581 Northern Trust Corp. 926,903
93,810 Norwest Corp. 3,359,571
37,136 PNC Bank Corp. 1,671,120
11,334 Providian Financial Corp. 961,265
12,829 Republic New York Corp. 506,746
19,731 State Street Corp. 1,076,573
22,077 Summit Bancorp 827,888
26,183 Suntrust Banks, Inc. 1,623,346
91,058 U.S. Bancorp 3,238,250
3,000 Union Planters Corp. 150,750
10,463 Wells Fargo & Co. 3,714,365
--------------
75,536,166
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-89
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Beverages--2.7%
4,847 Adolph Coors Co. $ 222,659
59,527 Anheuser Busch Companies, Inc. 3,214,458
8,338 Brown-Forman Corp. 500,280
302,732 Coca-Cola Co. 17,444,932
182,981 PepsiCo, Inc. 5,386,503
41,821 Seagram Co., Ltd. 1,199,740
--------------
27,968,572
- ------------------------------------------------------------
Chemicals--1.8%
29,032 Air Products & Chemicals, Inc. 863,702
27,494 Dow Chemical Co. 2,349,019
139,415 E.I. du Pont de Nemours & Co. 7,824,667
9,693 Eastman Chemical Co. 488,891
4,273 FMC Corp.(a) 220,327
11,631 Hercules, Inc. 349,657
73,630 Monsanto Co. 4,150,891
9,098 Nalco Chemical Co. 268,391
1,450 Octel Corp. 19,937
22,245 Rohm & Haas Co. 618,689
11,816 Sigma-Aldrich Corp. 341,187
16,553 Union Carbide Corp. 713,848
--------------
18,209,206
- ------------------------------------------------------------
Chemical-Specialty--0.2%
17,704 Engelhard Corp. 313,139
6,890 Great Lakes Chemical Corp. 267,849
15,765 Morton International, Inc. 344,859
19,079 Praxair, Inc. 623,645
10,164 Raychem Corp. 247,748
8,344 W.R. Grace & Co. 103,779
--------------
1,901,019
Commercial Services--0.1%
10,019 Deluxe Corp. $ 284,915
10,134 Moore Corp. Ltd. 107,041
--------------
391,956
- ------------------------------------------------------------
Computer Software & Services--7.7%
43,262 3Com Corp.(a) 1,300,564
8,105 Adobe Systems, Inc. 281,142
5,205 Autodesk, Inc. 136,631
37,139 Automatic Data Processing, Inc. 2,776,140
8,000 BMC Software Inc.(a) 480,500
17,685 Cabletron Systems, Inc.(a) 198,956
8,895 Ceridian Corp.(a) 510,351
190,886 Cisco Systems, Inc.(a) 11,799,141
68,058 Computer Associates International,
Inc. 2,518,146
18,951 Computer Sciences Corp.(a) 1,032,829
157,820 Dell Computer Corp.(a) 10,376,665
61,404 EMC Corp.(a) 3,511,541
54,932 First Data Corp. 1,290,902
19,246 Gateway 2000 Inc.(a) 1,003,198
10,010 KLA Instruments Corp.(a) 248,999
25,808 Micron Technology, Inc. 785,531
302,553 Microsoft Corp.(a) 33,299,740
43,302 Novell, Inc.(a) 530,449
118,640 Oracle Corp.(a) 3,455,390
32,079 Parametric Technology Co.(a) 322,795
29,665 Seagate Technology, Inc.(a) 743,479
21,546 Silicon Graphics, Inc.(a) 201,994
46,112 Sun Microsystems, Inc.(a) 2,296,954
--------------
79,102,037
- ------------------------------------------------------------
Construction--0.1%
9,737 Fluor Corp. 399,826
4,714 Foster Wheeler Corp. 64,818
4,791 Kaufman & Broad Home Corp. 112,289
5,743 Pulte Corp. 141,062
--------------
717,995
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-90
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Containers--0.1%
3,758 Ball Corp. $ 132,469
6,905 Bemis Co., Inc. 242,107
14,976 Crown Cork & Seal Co., Inc.(a) 400,608
19,126 Owens-Illinois, Inc.(a) 478,150
--------------
1,253,334
- ------------------------------------------------------------
Cosmetics & Soaps--2.2%
6,657 Alberto-Culver Co. 155,607
33,472 Avon Products, Inc. 939,308
12,666 Clorox Co. 1,044,945
36,065 Colgate-Palmolive Co. 2,470,453
137,439 Gillette Co. 5,257,042
13,275 International Flavors & Fragrances,
Inc. 438,075
164,619 Procter & Gamble Co. 11,677,660
--------------
21,983,090
- ------------------------------------------------------------
Diversified Gas--0.1%
25,503 Coastal Corp. 860,726
2,508 Eastern Enterprises, Inc. 105,649
5,423 NICOR, Inc. 224,716
3,576 Oneok, Inc. 121,584
--------------
1,312,675
- ------------------------------------------------------------
Drugs & Medical Supplies--12.2%
189,074 Abbott Laboratories 8,212,902
8,391 Allergan, Inc. 489,825
11,403 ALZA Corp.(a) 494,605
161,691 American Home Products Corp. 8,468,566
31,331 Amgen, Inc.(a) 2,367,449
7,238 Bausch & Lomb, Inc. 284,996
35,037 Baxter International, Inc. 2,084,701
30,712 Becton Dickinson & Co. 1,263,031
13,188 Biomet, Inc.(a) 457,459
23,831 Boston Scientific Corp.(a) 1,224,318
122,307 Bristol-Myers Squibb Co. 12,704,640
6,856 C.R. Bard, Inc. 252,815
16,566 Cardinal Health, Inc. $ 1,710,439
135,597 Eli Lilly & Co. 10,618,940
18,374 Guidant Corp. 1,364,269
164,874 Johnson & Johnson 12,901,390
8,203 Mallinckrodt, Inc. 166,623
57,779 Medtronic, Inc. 3,343,960
146,222 Merck & Co., Inc. 18,944,888
160,586 Pfizer, Inc. 17,012,079
62,014 Pharmacia & Upjohn, Inc. 3,112,328
89,962 Schering- Plough Corp. 9,316,690
10,366 St. Jude Medical, Inc.(a) 239,714
9,156 United States Surgical Corp. 381,691
100,556 Warner-Lambert Co. 7,591,978
--------------
125,010,296
- ------------------------------------------------------------
Electronics--3.9%
17,062 Advanced Micro Devices, Inc.(a) 316,713
26,692 AMP, Inc. 954,239
16,006 Apple Computer, Inc. 610,229
4,741 Data General Corp.(a) 51,558
5,085 EG&G, Inc. 115,048
48,100 Electronic Data Systems Corp. 1,596,319
54,475 Emerson Electric Co. 3,391,069
10,106 Harris Corp. 323,392
127,718 Hewlett-Packard Co. 6,761,072
207,172 Intel Corp. 17,764,999
16,522 LSI Logic Corp.(a) 208,590
73,612 Motorola, Inc. 3,142,312
19,876 National Semiconductor Corp.(a) 192,549
5,941 Perkin-Elmer Corp. 408,072
12,227 Tandy Corp. 654,145
6,012 Tektronix, Inc. 93,186
48,288 Texas Instruments, Inc. 2,547,192
6,333 Thomas & Betts Corp. 241,050
--------------
39,371,734
- ------------------------------------------------------------
Environmental Services--0.0%
39,256 Laidlaw, Inc. (Class 'B' Stock) 370,479
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-91
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services--3.7%
56,453 American Express Co. $ 4,382,164
13,815 Bear Stearns Companies, Inc. 427,402
32,925 Charles Schwab Corp. 1,296,422
13,237 Countrywide Mortgage Investments,
Inc. 550,990
21,088 Dun & Bradstreet Corp. 569,376
18,630 Equifax, Inc. 664,858
83,132 Federal Home Loan Mortgage Corp. 4,109,838
127,234 Fannie Mae 8,174,784
30,314 Franklin Resources, Inc. 909,420
12,680 H&R Block, Inc. 524,635
60,950 Household International Corp. 2,285,625
14,187 Lehman Brothers Holdings, Inc. 400,783
61,362 MBNA Corp. 1,756,487
42,317 Merrill Lynch & Co., Inc. 2,004,768
73,618 Morgan Stanley Dean Witter & Co. 3,170,175
26,400 Regions Financial Corp. 957,000
21,064 SLM Holding Corp. 683,264
24,196 SunAmerica, Inc. 1,475,956
31,266 Synovus Financial Corp. 617,504
7,699 Transamerica Corp. 816,094
46,901 Washington Mutual, Inc. 1,582,909
--------------
37,360,454
- ------------------------------------------------------------
Foods--2.6%
77,035 Archer-Daniels-Midland Co. 1,290,334
35,754 Bestfoods 1,731,834
55,147 Campbell Soup Co. 2,767,690
58,243 ConAgra, Inc. 1,568,921
19,036 General Mills, Inc. 1,332,520
5,700 Giant Foods, Inc. 246,169
44,814 H.J. Heinz & Co. 2,291,116
17,558 Hershey Foods Corp. 1,201,626
50,070 Kellogg Co. 1,649,180
17,389 Quaker Oats Co. 1,025,951
38,077 Ralston Purina Co. 1,113,752
57,543 Sara Lee Corp. 3,107,322
40,390 Sysco Corp. 951,689
78,352 Unilever N.V. 4,799,060
13,952 Wm. Wrigley Jr. Co. 1,059,480
--------------
26,136,644
Forest Products--1.0%
6,549 Boise Cascade Corp. $ 165,771
11,650 Champion International Corp. 364,791
26,823 Fort James Corp. 880,130
11,634 Georgia-Pacific Corp. 530,801
37,152 International Paper Co. 1,732,212
68,716 Kimberly-Clark Corp. 2,782,998
13,256 Louisiana-Pacific Corp. 270,091
12,269 Mead Corp. 361,169
3,337 Potlatch Corp. 113,666
11,879 Stone Container Corp. 102,456
7,345 Temple-Inland, Inc. 351,642
8,245 Union Camp Corp. 324,647
11,930 Westvaco Corp. 286,320
24,400 Weyerhaeuser Co. 1,029,375
13,680 Willamette Industries, Inc. 392,445
--------------
9,688,514
- ------------------------------------------------------------
Gas Pipelines--0.6%
20,097 Cinergy Corp. 768,710
10,306 Columbia Gas System, Inc.(a) 604,189
11,445 Consolidated Natural Gas Co. 623,753
40,853 Enron Corp., 2,157,549
3,832 Peoples Energy Corp. 137,952
52,892 Williams Companies, Inc. 1,520,645
--------------
5,812,798
- ------------------------------------------------------------
Hospital Management--0.7%
79,931 Columbia/HCA Healthcare Corp. 1,603,615
9,260 HCR Manor Care Inc. 271,434
52,749 Healthsouth Corp.(a) 557,161
19,810 Humana, Inc.(a) 324,389
20,355 IMS Health Inc. 1,260,738
31,360 Service Corp. International 999,600
3,097 Shared Medical Systems Corp. 164,722
37,348 Tenet Healthcare Corp.(a) 1,073,755
23,306 United Healthcare Corp. 815,710
--------------
7,071,124
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-92
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Housing Related--0.5%
5,104 Armstrong World Industries, Inc. $ 273,064
7,097 Centex Corp. 244,847
4,250 Fleetwood Enterprises, Inc. 128,297
43,474 Lowe's Companies, Inc. 1,383,017
42,626 Masco Corp. 1,049,665
11,918 Maytag Corp. 569,084
6,714 Owens Corning(a) 218,625
29,283 Pioneer Hi-Bred International, Inc. 768,679
10,838 Stanley Works 322,430
7,240 Tupperware Corp. 85,070
9,039 Whirlpool Corp. 424,833
--------------
5,467,611
- ------------------------------------------------------------
Insurance--4.3%
17,893 Aetna Life & Casualty Co. 1,243,564
102,808 Allstate Corp. 4,285,808
30,740 American General Corp. 1,963,517
128,925 American International Group, Inc. 9,927,225
20,593 Aon Corp. 1,328,248
20,334 Chubb Corp. 1,281,042
26,097 CIGNA Corp. 1,725,664
20,014 Cincinnati Financial Corp. 615,431
37,760 Conseco, Inc. 1,154,040
9,354 General Re Corp. 1,898,862
29,253 ITT Hartford Group, Inc. 1,387,689
13,091 Jefferson-Pilot Corp. 792,006
12,115 Lincoln National Corp. 996,459
31,370 Marsh & McLennan Companies, Inc. 1,560,657
11,972 MBIA, Inc. 642,747
13,720 MGIC Investment Corp. 505,925
8,693 Progressive Corp. 980,136
16,500 Provident Co., Inc. 556,875
17,629 SAFECO Corp. 734,909
29,417 St. Paul Companies, Inc. 956,053
17,215 Torchmark Corp. 618,664
141,688 Travelers Group, Inc. 5,313,300
17,285 UNUM Corp. $ 858,848
25,408 Wachovia Corp. 2,166,032
--------------
43,493,701
- ------------------------------------------------------------
Leisure--0.2%
11,899 Brunswick Corp. 153,943
12,724 Harrah's Entertainment, Inc.(a) 169,388
16,503 Hasbro, Inc. 486,839
9,102 King World Productions, Inc.(a) 237,790
36,113 Mattel, Inc. 1,011,164
21,907 Mirage Resorts, Inc.(a) 366,942
--------------
2,426,066
- ------------------------------------------------------------
Lodging--0.1%
30,221 Hilton Hotels Corp. 515,646
30,652 Marriott International, Inc.
(Class 'A' Stock) 731,816
--------------
1,247,462
- ------------------------------------------------------------
Machinery--0.7%
2,764 Briggs & Stratton Corp. 113,669
8,725 Case Corp. 189,769
45,028 Caterpillar, Inc. 2,006,560
4,296 Cincinnati Milacron, Inc. 66,320
14,520 Cooper Industries, Inc. 591,690
30,240 Deere & Co. 914,760
27,762 Dover Corp. 857,152
8,977 Eaton Corp. 562,746
5,521 Harnischfeger Industries, Inc. 62,111
20,295 Ingersoll-Rand Co. 769,942
9,582 PACCAR, Inc. 394,659
13,292 Parker Hannifin Corp. 394,606
7,642 Snap-On, Inc. 235,469
18,902 Thermo Electron Corp.(a) 284,711
7,537 Timken Co. 113,997
--------------
7,558,161
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-93
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--3.5%
87,328 CBS Corp. $ 2,117,704
30,138 Clear Channel Communications,
Inc.(a) 1,431,555
45,810 Comcast Corp. 2,150,207
11,704 Dow Jones & Co., Inc. 544,236
34,589 Gannett Co., Inc. 1,852,673
53,378 HBO & Co. 1,541,290
16,506 Interpublic Group of Companies, Inc. 890,292
10,183 Knight-Ridder, Inc. 453,144
12,000 McGraw Hill Companies, Inc. 951,000
74,881 Mediaone Group Inc. 3,327,524
6,696 Meredith Corp. 214,272
22,890 New York Times Co. 629,475
17,540 R.R. Donnelley & Sons, Co. 617,189
64,047 Tele-Communications, Inc.(a) 2,505,839
73,408 Time Warner, Inc. 6,427,788
10,738 Times Mirror Co. 570,456
15,341 Tribune Co. 771,844
43,516 Viacom, Inc.(a) 2,523,928
252,113 Walt Disney Co. 6,381,610
--------------
35,902,026
- ------------------------------------------------------------
Mineral Resources--0.3%
4,898 ASARCO, Inc. 93,674
45,224 Barrick Gold Corp. (ADR) (Canada) 904,480
26,665 Battle Mountain Gold Co. 161,657
11,362 Cyprus Amax Minerals Co. 150,547
22,428 Freeport-McMoran Copper & Gold, Inc. 266,332
26,684 Homestake Mining Co. 323,543
19,303 INCO Ltd. 197,856
18,997 Newmont Mining Corp. 460,677
7,285 Phelps Dodge Corp. 380,186
31,270 Placer Dome, Inc. 431,917
--------------
3,370,869
- ------------------------------------------------------------
Miscellaneous Basic Industry--5.3%
44,022 Applied Materials, Inc.(a) 1,111,556
35,458 BB&T Corp. 1,061,524
23,377 Browning-Ferris Industries, Inc. 707,154
103,459 Cendant Corp.(a) 1,202,711
8,384 Crane Co. 197,012
15,841 Ecolab, Inc. 450,479
21,608 Fortune Brands, Inc. $ 640,137
399,524 General Electric Co. 31,787,128
18,164 General Instruments Corp. 392,797
5,658 General Signal Corp. 192,018
30,668 Illinois Tool Works, Inc. 1,671,406
14,986 ITT Industries, Inc. 507,651
14,134 Loews Corp. 1,192,556
5,061 Millipore Corp. 96,475
1,023 NACCO Industries, Inc. 102,300
21,267 Omnicom Group 957,015
14,504 Pall Corp. 321,808
21,674 PPG Industries, Inc. 1,182,588
9,918 Sealed Air Corp. 316,136
20,167 Textron, Inc. 1,222,624
14,849 TRW, Inc. 658,924
71,492 Tyco International Ltd. 3,949,933
11,874 W.W. Grainger, Inc. 500,192
70,013 Waste Management Inc. 3,365,000
--------------
53,787,124
- ------------------------------------------------------------
Miscellaneous Consumer Growth--0.9%
9,598 American Greetings Corp. 379,721
11,532 Black & Decker Corp. 480,019
28,599 Corning, Inc. 841,883
39,565 Eastman Kodak Co. 3,058,869
4,358 Jostens, Inc. 90,429
49,699 Minnesota Mining & Manufacturing Co. 3,662,195
5,069 Polaroid Corp. 124,507
18,359 Rubbermaid, Inc. 439,469
--------------
9,077,092
- ------------------------------------------------------------
Office Equipment & Supplies--2.8%
14,168 Avery Dennison Corp. 618,964
203,747 Compaq Computer Corp.(a) 6,443,499
15,402 Honeywell, Inc. 986,691
16,041 Ikon Office Solutions, Inc. 115,295
115,317 International Business Machines
Corp. 14,760,576
33,425 Pitney Bowes, Inc. 1,756,902
30,290 Unisys Corp.(a) 689,097
40,299 Xerox Corp. 3,415,340
--------------
28,786,364
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-94
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum--6.9%
10,978 Amerada Hess Corp. $ 633,293
117,069 Amoco Corp. 6,307,092
14,910 Anadarko Petroleum Corp. 586,149
12,387 Apache Corp. 332,127
9,645 Ashland Oil, Inc. 446,081
39,538 Atlantic Richfield Co. 2,804,727
22,282 Burlington Resources, Inc. 832,790
80,162 Chevron Corp. 6,738,618
299,392 Exxon Corp. 21,013,576
5,720 Kerr-McGee Corp. 260,260
95,581 Mobil Corp. 7,258,182
45,038 Occidental Petroleum Corp. 968,317
5,619 Pennzoil Co. 197,016
32,336 Phillips Petroleum Co. 1,459,162
263,531 Royal Dutch Petroleum Co. (ADR)
(Netherlands) 12,550,664
11,614 Sun Co., Inc. 371,648
20,458 Tenneco, Inc. 672,557
66,346 Texaco, Inc. 4,159,065
30,245 Union Pacific Resources Group, Inc. 372,392
29,239 Unocal Corp. 1,059,914
35,260 USX- Marathon Corp. 1,249,526
--------------
70,273,156
- ------------------------------------------------------------
Petroleum Services--0.9%
38,079 Baker Hughes, Inc. 797,279
53,311 Halliburton Co. 1,522,695
6,058 Helmerich & Payne, Inc. 127,218
7,310 McDermott International, Inc. 196,913
12,301 Oryx Energy Co.(a) 159,144
46,152 PG&E Corp. 1,473,979
10,510 Rowan Companies, Inc.(a) 117,581
66,121 Schlumberger, Ltd. 3,326,713
28,639 Sempra Energy 746,404
12,859 Sonat, Inc. 384,163
--------------
8,852,089
- ------------------------------------------------------------
Railroads--0.6%
58,723 Burlington Northern, Inc. 1,879,136
26,603 CSX Corp. 1,118,989
46,111 Norfolk Southern Corp. $ 1,340,101
30,829 Union Pacific Corp. 1,314,086
--------------
5,652,312
- ------------------------------------------------------------
Restaurants--0.6%
17,902 Darden Restaurants, Inc. 286,432
83,765 McDonald's Corp. 4,999,723
19,166 Tricon Global Restaurants, Inc. 747,474
15,279 Wendy's International, Inc. 339,003
--------------
6,372,632
- ------------------------------------------------------------
Retail--5.4%
30,506 Albertson's, Inc. 1,651,137
34,221 American Stores Co. 1,101,488
18,100 AutoZone, Inc. 445,713
11,689 Circuit City Stores, Inc. 389,390
13,224 Consolidated Stores Corp.(a) 259,521
47,396 CVS Corp. 2,076,537
53,391 Dayton Hudson Corp. 1,908,728
13,223 Dillards, Inc. 374,376
23,513 Dollar General Corp. 626,020
25,775 Federated Department Stores, Inc.(a) 937,566
19,006 Fred Meyer, Inc.(a) 738,858
48,628 Gap, Inc. 2,565,127
4,177 Great Atlantic & Pacific Tea Co.,
Inc. 101,292
8,568 Harcourt General, Inc. 414,477
180,656 Home Depot, Inc. 7,135,912
30,984 J.C. Penney Co., Inc. 1,392,344
60,157 Kmart Corp. 718,124
19,200 Kohl's Corp. 748,800
31,861 Kroger Co.(a) 1,593,050
27,411 Limited, Inc. 601,329
8,396 Liz Claiborne, Inc. 219,870
4,682 Longs Drug Stores Corp. 188,158
28,781 May Department Stores Co. 1,482,221
19,102 Newell Co. 879,886
35,038 Nike, Inc. 1,289,836
19,000 Nordstrom, Inc. 470,250
6,657 Pep Boys - Manny, Moe & Jack 89,037
26,704 Price Costco, Inc.(a) 1,265,102
6,849 Reebok International Ltd. 92,890
31,387 Rite-Aid Corp. 1,114,239
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-95
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Retail (cont'd.)
47,696 Sears, Roebuck & Co. $ 2,107,567
20,816 Sherwin-Williams Co. 450,146
15,412 Supervalu, Inc. 359,292
39,516 TJX Companies, Inc. 703,879
35,207 Toys 'R' Us, Inc.(a) 569,913
16,334 Venator Group Inc. 141,902
274,763 Wal-Mart Stores, Inc. 15,008,929
61,389 Walgreen Co. 2,704,953
17,840 Winn-Dixie Stores, Inc. 663,425
--------------
55,581,284
- ------------------------------------------------------------
Rubber--0.1%
8,799 B.F. Goodrich Co. 287,617
9,588 Cooper Tire & Rubber Co. 172,584
19,471 Goodyear Tire & Rubber Co. 1,000,323
--------------
1,460,524
- ------------------------------------------------------------
Steel - Producers--0.1%
25,237 Allegheny Teldyne, Inc. 449,534
10,226 Armco, Inc.(a) 51,130
15,334 Bethlehem Steel Corp.(a) 126,506
10,428 Nucor Corp. 423,637
10,909 USX Corp. - U.S. Steel Group 260,452
11,408 Worthington Industries, Inc. 142,600
--------------
1,453,859
- ------------------------------------------------------------
Telecommunications--3.6%
34,034 Alltel Corp. 1,612,361
10,622 Andrew Corp.(a) 140,741
24,208 Ascend Communications, Inc.(a) 1,101,464
20,681 Frontier Corp. 566,142
161,322 Lucent Technologies, Inc. 11,141,301
221,300 MCI WorldCom, Inc. 10,816,054
34,020 Nextel Communications, Inc. 686,779
80,415 Northern Telecom, Ltd. 2,573,280
9,188 Scientific-Atlanta, Inc. 194,096
52,392 Sprint Corp. 3,772,224
23,447 Tellabs, Inc.(a) 933,484
62,975 US West, Inc. 3,302,252
--------------
36,840,178
Textiles--0.1%
8,885 Fruit of the Loom, Inc.(a) $ 133,830
5,040 National Service Industries, Inc. 160,650
4,048 Russell Corp. 106,260
2,188 Springs Industries, Inc. 76,033
15,534 V.F. Corp. 576,700
--------------
1,053,473
- ------------------------------------------------------------
Tobacco--1.5%
298,579 Philip Morris Companies, Inc. 13,753,295
37,000 RJR Nabisco Holdings Corp. 931,938
22,199 UST, Inc. 656,258
--------------
15,341,491
- ------------------------------------------------------------
Trucking & Shipping--0.1%
18,058 FDX Corp. 814,867
9,221 Ryder System, Inc. 229,373
--------------
1,044,240
- ------------------------------------------------------------
Utilities - Communications--5.8%
70,231 AirTouch Communications Inc.(a) 4,003,167
134,493 Ameritech Corp. 6,371,606
221,624 AT&T Corp. 12,951,152
190,722 Bell Atlantic Corp. 9,238,097
120,828 BellSouth Corp. 9,092,307
117,914 GTE Corp. 6,485,270
225,418 SBC Communications, Inc. 10,017,012
25,970 Unicom Corp. 970,629
--------------
59,129,240
- ------------------------------------------------------------
Utilities - Electric--2.5%
17,269 Ameren Corp. 724,219
23,771 American Electric Power, Inc. 1,160,322
17,729 Baltimore Gas & Electric Co. 591,705
18,182 Carolina Power & Light Co. 839,781
27,001 Central & South West Corp. 771,216
28,951 Consolidated Edison, Inc. 1,509,071
24,449 Dominion Resources, Inc. 1,091,037
17,487 DTE Energy Co. 790,194
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-96
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Portfolio of Investments as of September 30, 1998
PRUDENTIAL STOCK INDEX FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utilities - Electric (cont'd.)
44,231 Duke Energy Co. $ 2,927,539
44,262 Edison International 1,136,980
30,115 Entergy Corp. 926,036
29,577 FirstEnergy Corp. 918,736
22,236 FPL Group, Inc. 1,549,571
16,028 GPU Inc. 681,190
35,679 Houston Industries, Inc. 1,110,509
23,524 Niagara Mohawk Power Corp. 361,682
18,173 Northern States Power Co. 509,980
36,182 Pacificorp 694,242
26,655 PECO Energy Co. 974,573
21,726 PP&L Resources, Inc. 562,160
29,097 Public Service Enterprise Group Inc. 1,143,876
85,615 Southern Co. 2,520,292
33,814 Texas Utilities Co. 1,574,464
--------------
25,069,375
Total common stocks
(cost $863,652,224) 998,073,470
--------------
<CAPTION>
Principal
Amount
(000)
SHORT-TERM INVESTMENTS--2.2%
- ------------------------------------------------------------
U.S. Government Securities--0.1%
$1,500(b) United States Treasury Bill
4.66%, 12/17/98
(cost $1,485,049) $ 1,485,049
--------------
- ------------------------------------------------------------
Repurchase Agreement--2.1%
21,675 Joint Repurchase Agreement Account,
5.522%, 10/01/98 (Note 5)
(cost $21,675,000) 21,675,000
--------------
Total short-term investments
(cost $23,160,049) 23,160,049
--------------
- ------------------------------------------------------------
Total Investments--100.0%
(cost $886,812,273; Note 4) 1,021,233,519
Liabilities in excess of other
assets--0.0% (451,458)
--------------
Net Assets--100% $1,020,782,061
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-97
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Statement of Assets and Liabilities PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
Assets September 30, 1998
<S> <C>
Investments, at value (cost $886,812,273)............................................................... $ 1,021,233,519
Cash.................................................................................................... 269,486
Receivable for Fund shares sold......................................................................... 5,064,008
Dividends and interest receivable....................................................................... 1,443,344
Receivable from Manager................................................................................. 86,971
Receivable for investments sold......................................................................... 15,513
Prepaid expenses........................................................................................ 12,583
------------------
Total assets......................................................................................... 1,028,125,424
------------------
Liabilities
Payable for Fund shares reacquired...................................................................... 4,040,065
Payable for investments purchased....................................................................... 2,542,836
Due to broker-variation margin.......................................................................... 582,750
Accrued expenses........................................................................................ 127,508
Management fee payable.................................................................................. 50,204
------------------
Total liabilities.................................................................................... 7,343,363
------------------
Net Assets.............................................................................................. $ 1,020,782,061
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 44,144
Paid-in capital in excess of par..................................................................... 872,713,597
------------------
872,757,741
Undistributed net investment income.................................................................. 9,665,888
Accumulated net realized gain on investments......................................................... 4,209,361
Net unrealized appreciation on investments........................................................... 134,149,071
------------------
Net assets, September 30, 1998.......................................................................... $ 1,020,782,061
------------------
------------------
Class I:
Net asset value and redemption price per share
($639,408,023 / 27,641,382 shares of beneficial interest issued and outstanding).................. $23.13
------------------
------------------
Class Z:
Net asset value and redemption price per share
($381,374,038 / 16,501,694 shares of beneficial interest issued and outstanding).................. $23.11
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-98
<PAGE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL STOCK INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $77,842).................. $ 12,244,419
Interest.............................. 1,760,383
------------------
Total income....................... 14,004,802
------------------
Expenses
Management fee........................ 2,457,979
Transfer agent's fees and expenses.... 610,000
Custodian's fees and expenses......... 192,000
Reports to shareholders............... 115,000
Registration fees..................... 70,000
Legal fees............................ 30,000
Audit fees............................ 15,000
Trustees' fees........................ 7,000
Organization expense.................. 1,200
Miscellaneous......................... 28,657
------------------
Total expenses..................... 3,526,836
Less: Expense subsidy (Note 2)........... (757,261)
------------------
Net expenses....................... 2,769,575
------------------
Net investment income.................... 11,235,227
------------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on:
Investment transactions............... 3,711,241
Financial futures contracts........... 950,761
------------------
4,662,002
------------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... 18,357,270
Financial futures contracts........... (550,125)
------------------
17,807,145
------------------
Net gain on investments.................. 22,469,147
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 33,704,374
------------------
------------------
</TABLE>
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL STOCK INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended September 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........ $ 11,235,227 $ 5,079,584
Net realized gain on
investment transactions
and financial futures
contracts................. 4,662,002 10,547,030
Net change in unrealized
appreciation on
investments............... 17,807,145 80,327,178
-------------- ------------
Net increase in net assets
resulting from
operations................ 33,704,374 95,953,792
-------------- ------------
Dividends and distributions
(Note 1):
Dividends to shareholders
from net investment
income.................... (5,903,209) (3,111,526)
-------------- ------------
Distributions to shareholders
from net realized gains... (10,316,301) (1,795,111)
-------------- ------------
Fund share transactions (Note
6):
Net proceeds from shares
sold...................... 1,025,544,442 447,194,409
Net asset value of shares
issued to shareholders in
reinvestment of
distributions............. 16,213,432 4,906,633
Cost of shares reacquired.... (536,468,042) (229,519,348)
-------------- ------------
Net increase in net assets
from Fund share
transactions.............. 505,289,832 222,581,694
-------------- ------------
Net increase.................... 522,774,696 313,628,849
Net Assets
Beginning of year............... 498,007,365 184,378,516
-------------- ------------
End of year(a).................. $1,020,782,061 $498,007,365
-------------- ------------
-------------- ------------
- ---------------
(a) Includes undistributed net
investment income of........ $ 9,665,888 $ 4,093,229
-------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-99
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
The Prudential Index Series Fund (the 'Company'), formerly the Prudential Dryden
Fund 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 five separate
funds, one of which is the Prudential Stock Index Fund (the 'Fund').
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. Investment operations of the Fund commenced
on November 5, 1992. The Fund's investment objective is 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 or Nasdaq are valued at the
last sale price on such exchange or board of trade on the date of valuation or,
if there were no sales on such day, at the mean between the closing bid and
asked prices quoted on such day or at the bid price in the absence of an asked
price.
Securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued by a principal market maker or independent pricing
agent.
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
methodology or provides a valuation or methodology that, in the judgment of the
subadvisers, does not represent fair value, are 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, under triparty repurchase
agreements, as the case may be take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Net 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.
Net investment income (other than transfer agent fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Transfer agent fees are allocated based on shareholder activity and number of
accounts for each class.
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 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 net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.
- --------------------------------------------------------------------------------
B-100
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
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 investment income and net capital gains, if
any, 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
such amount was deferred and amortized over a 60-month period ending October
1997.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income and decrease
accumulated net realized gain on investments and foreign currencies by $240,641.
Net realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
('PIFM'). Pursuant to this agreement PIFM has responsibility for all investment
advisory services. PIFM has a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). PIC, subject to the supervision of PIFM, manages
the assets of the Fund in accordance with its investment objective and policies.
PIFM 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. The management fee paid to PIFM is computed
daily and payable monthly at an annual rate of .30 of 1% of the Fund's average
daily net assets.
PIFM has agreed to reimburse the Fund so that total operating expenses do not
exceed .40% of the average net assets for Class Z shares of the Fund. PIFM has
agreed to reimburse the Fund so that total operating expenses do not exceed .30%
of the average net assets for Class I shares of the Fund. This voluntary waiver
may be terminated at any time without notice. For the year ended September 30,
1998, PIFM subsidized $757,261 of the expenses of the Fund (.09% of the average
net assets of the Fund $.00172 per share).
Prudential Securities Incorporated ('PSI') acted as the distributor of the
Fund's shares through May 31, 1998. Prudential Investment Management Services
('PIMS') became the distributor of the Fund effective June 1, 1998 and is
serving under the same terms and conditions as under the agreement with PSI.
Under the distribution agreement, PSI and PIMS incurred the expenses of
distributing the Fund's shares, none of which is reimbursed or paid for by the
Fund.
PIC, PIFM, PIMS and PSI are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement during the year
ended September 30, 1998. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds. The Agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the period ended September 30, 1998,
the Fund incurred fees of approximately $595,000 for the services of PMFS. As of
September 30, 1998, approximately $63,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the period ended September 30, 1998 aggregated $508,996,569 and $10,205,868,
respectively.
- --------------------------------------------------------------------------------
B-101
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Notes to Financial Statements PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
On September 30, 1998, the Fund held 74 purchased financial futures contracts on
the S&P 500 Index expiring by December 1998. The cost of such contracts was
$19,253,175. The value of such contracts on September 30, 1998 was $18,981,000,
thereby resulting in an unrealized loss of $272,175.
The cost basis of investments for federal income tax purposes was $886,812,273
and, accordingly, as of September 30, 1998, net unrealized appreciation for
federal income tax purposes was $133,333,592 (gross unrealized
appreciation--$181,624,220; gross unrealized depreciation--$47,290,628).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1998, the Fund
had a 3% undivided interest in the repurchase agreements in the joint account.
The undivided interest represented $21,675,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the collateral therefor
was as follows:
Warburg Dillon Read LLC, 5.52%, in the principal amount of $210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the collateral
including accrued interest was $214,255,819.
Bear Stearns & Co., 5.58%, in the principal amount of $210,000,000, repurchase
price $210,032,550, due 10/1/98. The value of the collateral including accrued
interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98. The value of the
collateral including accrued interest was $111,084,883.
Goldman Sachs & Co., 5.54%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 10/1/98. The value of the collateral including accrued
interest was $214,200,293.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class I and Class Z shares. Class I shares are not subject to
any sales or redemption charge and are offered to certain pension, profit
sharing or other employee benefit plans qualified under Section 401, 457 or
403(b)(7) of the Internal Revenue Code. Class Z shares are not subject to any
sales or redemption charge and are offered exclusively for sale to a limited
group of investors.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value dividend into two classes, designated Class Z and Class I.
Transactions in shares of beneficial interest during the fiscal year ended
September 30, 1998 and the fiscal year ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Class I Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold...................... 25,552,010 $ 611,299,960
Shares issued in reinvestment of
dividends and distributions.... 498,260 10,662,778
Shares reacquired................ (12,681,495) (302,961,258)
----------- -------------
Net increase in shares
outstanding.................... 13,368,775 $ 319,001,480
----------- -------------
----------- -------------
August 1, 1997(a) through
September 30, 1997:
Shares sold...................... 2,006,789 $ 42,151,000
Shares issued in reinvestment of
dividends and distributions.... -- --
Shares reacquired................ (1,553,190) (33,405,742)
----------- -------------
Net increase in shares
outstanding before exchange.... 453,599 8,745,258
Shares issued upon exchange from
Class Z........................ 13,819,008 303,202,163
----------- -------------
Net increase in shares
outstanding.................... 14,272,607 $ 311,947,421
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ---------------------------------
Year ended September 30, 1998:
Shares sold...................... 17,424,666 $ 414,244,482
Shares issued in reinvestment of
dividends and distributions.... 259,498 5,550,654
Shares reacquired................ (9,685,172) (233,506,784)
----------- -------------
Net increase in shares
outstanding.................... 7,998,992 $ 186,288,352
----------- -------------
----------- -------------
Year ended September 30, 1997:
Shares sold...................... 21,286,422 $ 405,043,409
Shares issued in reinvestment of
dividends and distributions.... 283,293 4,906,633
Shares reacquired................ (10,728,183) (196,113,606)
----------- -------------
Net increase in shares
outstanding before exchange.... 10,841,532 213,836,436
Shares issued upon exchange to
Class I........................ (13,819,008) (303,202,163)
----------- -------------
Net decrease in shares
outstanding.................... (2,977,476) $ (89,365,727)
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Commencement of offering of Class I shares.
Of the shares outstanding at September 30, 1998, PIFM and affiliates owned
8,304,318.76 shares of the Fund.
- --------------------------------------------------------------------------------
B-102
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Financial Highlights PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z Class I
----------------------------------------------------------- -------------
Year Ended September 30, Year Ended
----------------------------------------------------------- September 30,
1998 1997 1996 1995 1994 1998
-------- -------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 21.86 $ 16.06 $ 14.22 $ 11.27 $ 11.12 $ 21.87
-------- -------- -------- -------- ------- -------------
Income from investment operations:
Net investment income(b)................... .15 .46 .25 .23 .26 .31
Net realized and unrealized gain on
investment transactions................. 1.69 5.75 2.44 2.97 .11 1.55
-------- -------- -------- -------- ------- -------------
Total from investment operations......... 1.84 6.21 2.69 3.20 .37 1.86
-------- -------- -------- -------- ------- -------------
Less distributions:
Dividends from net investment income....... (.21) (.26) (.28) (.22) (.18) (.22)
Distributions from net realized gains...... (.38) (.15) (.57) (.03) (.04) (.38)
-------- -------- -------- -------- ------- -------------
Total distributions...................... (.59) (.41) (.85) (.25) (.22) (.60)
-------- -------- -------- -------- ------- -------------
Net asset value, end of period............. $ 23.11 $ 21.86 $ 16.06 $ 14.22 $ 11.27 $ 23.13
-------- -------- -------- -------- ------- -------------
-------- -------- -------- -------- ------- -------------
TOTAL RETURN(d)............................ 8.61% 39.34% 19.72% 29.02% 3.33% 8.69%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $381,374 $185,881 $184,379 $101,945 $50,119 $ 639,408
Average net assets (000)................... $313,721 $254,644 $142,540 $ 71,711 $38,098 $ 505,605
Ratios to average net assets:(b)
Expenses................................. .40% .46% .60% .60% .60% .30%
Net investment income.................... 1.30% 1.66% 1.92% 2.55% 2.34% 1.42%
Portfolio turnover rate.................... 1% 5% 2% 11% 2% 1%
<CAPTION>
August 1,
1997(a)
Through
September 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 21.87
-------------
Income from investment operations:
Net investment income(b)................... .06
Net realized and unrealized gain on
investment transactions................. (.06)
-------------
Total from investment operations......... --
-------------
Less distributions:
Dividends from net investment income....... --
Distributions from net realized gains...... --
-------------
Total distributions...................... --
-------------
Net asset value, end of period............. $ 21.87
-------------
-------------
TOTAL RETURN(d)............................ 0%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 312,127
Average net assets (000)................... $ 296,788
Ratios to average net assets:(b)
Expenses................................. .30%(c)
Net investment income.................... 1.73%(c)
Portfolio turnover rate.................... 5%
</TABLE>
- ---------------
(a) Commencement of offering of Class I shares.
(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-103
<PAGE>
PRUDENTIAL INDEX SERIES FUND
Report of Independant Accountants PRUDENTIAL STOCK INDEX FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Prudential Index Series Fund--Prudential Stock Index Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Index Series
Fund--Prudential Stock Index Fund (the 'Fund,' one of the portfolios
constituting Prudential Index Series Fund) (formerly The Prudential Dryden
Fund--Prudential Stock Index Fund) at September 30, 1998, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for each of
the three periods in the period ended September 30, 1996 were audited by other
independent accountants, whose opinion dated November 13, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
- --------------------------------------------------------------------------------
B-104
<PAGE>
================================================================================
APPENDIX
================================================================================
DESCRIPTION OF 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 rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
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--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
VALUE OF $1.00 INVESTED ON
1/1/26 THROUGH 12/31/97
---------------------------------------
SMALL STOCKS $5,519.97
COMMON STOCKS $1,828.33
LONG-TERM BONDS $39.07
TREASURY BILLS $14.25
INFLATION $9.02
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and 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).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the 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.
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT TREASURY BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT MORTGAGE SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD CORPORATE BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
- ------------------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
- ------------------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.12
</TABLE>
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S.
dollar-denominated issues and include debt issued or guaranteed by foreign
sovereign governments, municipalities, governmental agencies or
international agencies. All bonds in the index have maturities of at least
one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at
least one year.
5 SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE>
- --------------------------------------------------------------------------------
This chart illustrates the performance of major world stock markets for the
period from 1986 through December 31, 1997. It does not represent the
performance of any Prudential Mutual Fund.
Total Returns of Major World Stock Markets 12/31/86-12/31/97
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
-----------------------------------------------------------
THE NETHERLANDS 20.5%
SWEDEN 20.4%
SPAIN 20.4%
HONG KONG 19.7%
BELGIUM 19.5%
SWITZERLAND 17.9%
USA 17.1%
UK 16.6%
FRANCE 15.6%
GERMANY 12.1%
AUSTRIA 9.6%
JAPAN 6.6%
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. as of 12/31/97. Used with permission. Morgan Stanley Country
indices are unmanaged indices which include those stocks making up the largest
two-thirds of each country's total stock market capitalization. Returns reflect
the reinvestment of all distributions. This chart is for illustrative purposes
only and is not indicative of the past, present or future performance of any
specific investment. Investors cannot invest directly in stock indices.
- --------------------------------------------------------------------------------
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
-----------------------------------------------------------
Capital Appreciation and Reinvesting Dividends $304,596
Capital Appreciation only $105,413
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
- -------------------------------------------------------------------------------
World Stock Market Capitalization By Region
World Total: $12.5 Trillion
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
-----------------------------------------------------------
CANADA 2.5%
U.S. 49.8%
PACIFIC BASIN 15.6%
EUROPE 32.1%
Source: Morgan Stanley Capital International, December 31, 1997. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
(PASTE-UP CHART)
- -------------
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
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,
1977 through December 31, 1997. 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.
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK & BOND
INDICES OVER THE PAST 20 YEARS
(12/31/77 - 12/31/97)*
---------------------------------------------------------
S&P 500 37.6% -7.2%
EAFE 69.9% -23.2%
Lehman Aggregate 32.6% -2.9%
"BEST RETURNS ZONE"
WITH A DIVERSIFIED BLEND
1/3 S&P 500 INDEX
1/3 EAFE INDEX
1/3 LEHMAN AGGREGATE INDEX
- -------------
*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.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has 25
million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.5 million cars and insures approximately 1.2 million homes.
Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential, (of which
Prudential Mutual Funds is a key part) manages over $211 billion in assets of
institutions and individuals. In Pension & Investments, May 12, 1997, Prudential
was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents and more than 1,100 offices throughout the United States.2
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $4 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997, Prudential Investments Fund Management was the
18th 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.
- ------------
1 PIC serves as the subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator
Asset Management LP, as the subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. There are multiple subadvisers for
The Target Portfolio Trust.
2 As of December 31, 1996.
III-1
<PAGE>
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 LLC, a premier institutional equity
manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase(3). Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data(4). On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets(5). Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities(6).
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ------------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Investments, a business group of PIC, for the year ended
December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities(7).
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Three
Prudential Securities analysts were ranked as first-team finishers(8).
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- -----------
(7) As of December 31, 1997.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
1. Financial Statements included in the Prospectuses constituting Part
A of this Registration Statement:
Financial Highlights.
2. Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at September 30, 1998.
Statement of Assets and Liabilities at September 30, 1998.
Statement of Operations for the year ended September 30, 1998.
Statements of Changes in Net Assets for the periods ended
September 30, 1998 and 1997 for Prudential Stock Index Fund,
Prudential Pacific Index Fund and the period ended September
30, 1998 for Prudential Bond Market Index Fund, Prudential
Europe Index Fund and Prudential Small-Cap Index Fund.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
(b) EXHIBITS:
1. (a) Certificate of Trust of the Registrant. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A filed via EDGAR on
April 4, 1997 (File No. 33-48066).
(b) First Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A filed
via EDGAR on April 4, 1997 (File No. 33-48066).
(c) Second Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(c) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed
via EDGAR on November 27, 1996 (File No. 33-48066).
(d) Declaration of Trust of the Registrant. Incorporated by
reference to Exhibit 1(d) to Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A filed via EDGAR on
April 4, 1997 (File No. 33-48066).
(e) First Amendment to Declaration of Trust of the Registrant.
Incorporated by reference to Exhibit 1(e) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A
filed via EDGAR on April 4, 1997 (File No. 33-48066).
(f) Second Amendment to Declaration of Trust of the
Registrant. Incorporated by reference to Exhibit 1(f) to
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A filed via EDGAR on November 27, 1996 (File No.
33-48066).
(g) Third Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(g) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A
filed on January 22, 1998 (File No. 33-48066).
(h) Third Amendment to Declaration of Trust of the Registrant.
Incorporated by reference to Exhibit 1(h) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A
filed on January 22, 1998 (File No. 33-48066).
2. By-Laws of the Registrant as revised and restated October 5, 1992.
Incorporated by reference to Exhibit 2 to Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A filed via EDGAR on
April 4, 1997 (File No. 33-48066).
C-1
<PAGE>
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by
reference to Exhibits 1 and 2.
5. (a) Management Agreement for Prudential Stock Index Fund with
Prudential Mutual Fund Management LLC. Incorporated by reference to
Exhibit 5(e) to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A filed via EDGAR on November 27, 1996 (File
No. 33-48066).
(b) Subadvisory Agreement between Prudential Mutual Fund Management
LLC and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(f)(i) to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A filed via EDGAR on November
27, 1996 (File No. 33-48066).
(c) Management Agreement for Prudential Bond Market Index Fund,
Prudential Europe Index Fund, Prudential Pacific Index Fund and
Prudential Small-Cap Index Fund, with Prudential Investments Fund
Management LLC. Incorporated by reference to Exhibit 5(c) to
Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A filed on January 22, 1998 (File No. 33-48066).
(d) Subadvisory Agreement between Prudental Investments Fund
Management LLC and The Prudential Investment Corporation for
Prudential Bond Market Index Fund, Prudential Europe Index Fund,
Prudential Pacific Index Fund and Prudential Small-Cap Index Fund.
Incorporated by reference to Exhibit 5(d) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A filed on
January 22, 1998 (File No. 33-48066).
6. (a) Distribution Agreement.*
(b) Form of Selected Dealer Agreement.*
7. Not Applicable.
8. Custodian Agreement between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A filed via EDGAR on April 4, 1997 (File No. 33-48066).
9. Transfer Agency and Service Agreement. Incorporated by reference
to Exhibit 9 to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A filed via EDGAR on April 4, 1997 (File No.
33-48066).
10. (a) Opinion of Arnold & Porter. Incorporated by reference to
Exhibit 10(a) to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A filed via EDGAR on April 4, 1997 (File No.
33-48066).
(b) Opinion of Morris, Nichols, Arsht & Tunnell. Incorporated by
reference to Exhibit 10(b) to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A filed via EDGAR on April 4, 1997
(File No. 33-48066).
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit 16 to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed via EDGAR on January 30,
1995 (File No. 33-48066).
18. Rule 18f-3 Plan.*
27. Financial Data Schedules for the fiscal year ended September 30,
1998.*
- -------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of November 13, 1998 there were 316, 255, 41, 586 and 7,491
recordholders of Class Z shares of beneficial interest of Prudential Bond Market
Index Fund, Prudential Europe Index Fund, Prudential Pacific Index Fund,
Prudential
C-2
<PAGE>
Small-Cap Index Fund and Prudential Stock Index Fund, respectively. As of
November 13, 1998, there were 11 recordholders of Class I shares of Prudential
Stock Index Fund.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940, as amended, (the 1940 Act) and pursuant to Del. Code Ann. title 12 sec.
3817, a Delaware business trust may provide in its governing instrument for the
indemnification of its officers and trustees from and against any and all claims
and demands whatsoever. Article VII, Section 2 of the Agreement and Declaration
of Trust states that (i) the Registrant shall indemnify any present trustee or
officer to the fullest extent permitted by law against liability, and all
expenses reasonably incurred by him or her in connection with any claim, action,
suit or proceeding in which he or she is involved by virtue of his or her
service as a trustee, officer or both, and against any amount incurred in
settlement thereof and (ii) all persons extending credit to, contracting with or
having any claim against the Registrant shall look only to the assets of the
appropriate Series (or if no Series has yet been established, only to the assets
of the Registrant). Indemnification will not be provided to a person adjudged by
a court or other adjudicatory body to be liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties (collectively "disabling conduct"). In
the event of a settlement, no indemnification may be provided unless there has
been a determination, as specified in the Declaration of Trust, that the officer
or trustee did not engage in disabling conduct. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 8 of the Distribution Agreement (Exhibit 6 to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant intends to purchase an insurance policy insuring its
officers and trustees against liabilities, and certain costs of defending claims
against such officers and trustees, to the extent such officers and trustees are
not found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreements (Exhibits 5(a) and (c) to the
Registration Statement) and Section 4 of the Subadvisory Agreements (Exhibits
5(b) and (d) to the Registration Statement) limit the liability of Prudential
Investments Fund Management LLC (PIFM) and The Prudential Investment Corporation
(PIC), respectively, to liabilities arising from willful misfeasance, bad faith
or gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws, and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC (PIFM).
See Management of the Company in the Prospectus constituting Part A of this
Registration Statement and Management of the Company in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. The address of each person is Gateway
Center Three, 100 Mulberry Street, 9th Floor, Newark, NJ 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Frank W. Giordano Executive Vice President, Senior Vice President, Prudential Securities Incorporated;
Secretary and General Executive Vice President, Secretary and General Counsel,
Counsel PIFM
Robert F. Gunia Executive Vice President Vice President, Prudential; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President of Prudential
Securities Incorporated (Prudential Securities)
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing,
Prudential Mutual Funds & Annuities (PMF&A); Executive Vice
President, PIFM
Brian M. Storms Officer-In-Charge, President, Prudential Investments; Officer-In-Charge, President,
President, Chief Chief Executive Officer and Chief Operating Officer, PIFM
Executive Officer and
Chief Operating Officer
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed" in the Prospectuses constituting Part A of this Registration Statement and "Manager and
Subadviser" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and principal executive officers are as set forth below. The
address of each person is 751 Broad Street, Newark, NJ 07102.
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments (PIC) of
President and Chief The Prudential Insurance Company of America (Prudential)
Executive Officer and
Director
John R. Strangfeld Vice President and Director President of Private Asset Management Group of Prudential;
Vice President and Director, PIC
</TABLE>
C-4
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS).
PIMS is distributor for Cash Accumulation Trust, Command Government
Fund, Command Money Fund, Command Tax-Free Fund, The Global Total Return
Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund,
Prudential California Municipal Fund, Prudential Diversified Bond Fund,
Inc., Prudential Distressed Securities Fund, Inc., Prudential Diversified
Funds, Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global
Income Fund, Inc., Prudential International Bond Fund, Inc., The Prudential
Investment Portfolios, Inc., Prudential Mid-Cap Value Fund, Prudential
MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc.,Prudential Real Estate Securities Fund,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential
Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc.,
Prudential 20/20 Focus Fund, Prudential Utility Fund, Inc., Prudential
World Fund, Inc. and The Target Portfolio Trust.
(b) Information concerning directors and officers of PIMS is set forth
below.
POSTITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
------- -------------- -------------
E. Michael Caulfield......... President None
Mark R. Fetting
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102... Executive Vice President None
Jean D. Hamilton............. Executive Vice President None
Ronald P. Joelson............ Executive Vice President None
Brian M. Storms
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102.... Executive Vice President None
John R. Strangfeld........... Executive Vice President None
Mario A. Mosse............... Senior Vice President
and Chief Operating Officer None
Scott S. Wallner............. Vice President, Secretary
and Chief Legal Officer None
Michael G. Williamson........ Vice President, Comptroller
and Chief Financial Officer None
C. Edward Chaplin............ Treasurer None
- -------------
(1) The address of each person named is Prudential Plaza, Newark, New Jersey
07102 unless otherwise noted.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102; the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, NJ 07102-4077; and Prudential Mutual Fund
Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents required by
Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at 751
Broad Street, Newark, New Jersey 07102 and 51 JFK Parkway, Short
C-5
<PAGE>
Hills, New Jersey 07078, for Prudential Bond Market Index Fund, Prudential
Europe Index Fund, Prudential Pacific Index Fund, Prudential Small-Cap Index
Fund and Prudential Stock Index Fund and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "How the Fund is Managed" or "How
the Funds are Managed" in the Prospectuses and under the caption "Manager and
Subadviser" in the Statement of Additional Information, constituting Parts A and
B, respectively, of this Post-Effective Amendment to the Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to the Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to the Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newark, and the State of New Jersey, on the 25th
day of November, 1998.
PRUDENTIAL INDEX SERIES FUND
By /s/ BRIAN M. STORMS
-----------------------------
BRIAN M. STORMS, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 11 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GRACE C. TORRES Treasurer and Principal Financial November 25, 1998
----------------------------- and Accounting Officer
GRACE C. TORRES
/s/ EDWARD D. BEACH Trustee November 25, 1998
-----------------------------
EDWARD D. BEACH
/s/ DELAYNE DEDRICK GOLD Trustee November 25, 1998
-----------------------------
DELAYNE DEDRICK GOLD
/s/ ROBERT F. GUNIA Trustee November 25, 1998
-----------------------------
ROBERT F. GUNIA
/s/ DOUGLAS H. McCORKINDALE Trustee November 25, 1998
-----------------------------
DOUGLAS H. MCCORKINDALE
/s/ MENDEL A. MELZER Trustee November 25, 1998
-----------------------------
MENDEL A. MELZER
/s/ THOMAS T. MOONEY Trustee November 25, 1998
-----------------------------
THOMAS T. MOONEY
/s/ STEPHEN P. MUNN Trustee November 25, 1998
-----------------------------
STEPHEN P. MUNN
/s/ RICHARD A. REDEKER Trustee November 25, 1998
-----------------------------
RICHARD A. REDEKER
/s/ ROBIN B. SMITH Trustee November 25, 1998
-----------------------------
ROBIN B. SMITH
/s/ BRIAN M. STORMS President and Trustee November 25, 1998
-----------------------------
BRIAN M. STORMS
/s/ LOUIS A. WEIL, III Trustee November 25, 1998
-----------------------------
LOUIS A. WEIL, III
/s/ CLAY T. WHITEHEAD Trustee November 25, 1998
-----------------------------
CLAY T. WHITEHEAD
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ------------- ----------- ----
<S> <C> <C>
1. (a) Certificate of Trust of the Registrant. Incorporated by reference to
Exhibit 1(a) to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A filed via EDGAR on April 4, 1997 (File No.
33-48066).
(b) First Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A filed via EDGAR on
April 4, 1997 (File No. 33-48066).
(c) Second Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment
No. 7 to the Registration Statement on Form N-1A filed via EDGAR on
November 27, 1996 (File No. 33-48066).
(d) Declaration of Trust of the Registrant. Incorporated by reference to
Exhibit 1(d) to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A filed via EDGAR on April 4, 1997 (File No.
33-48066).
(e) First Amendment to Declaration of Trust of the Registrant.
Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A filed via EDGAR on
April 4, 1997 (File No. 33-48066).
(f) Second Amendment to Declaration of Trust of the Registrant.
Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment
No. 7 to the Registration Statement on Form N-1A filed via EDGAR on
November 27, 1996 (File No. 33-48066).
(g) Third Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment
No. 10 to the Registration Statement on Form N-1A filed on January 22,
1997 (File No. 33-48066).
(h) Third Amendment to Declation of Trust of the Registrant. Incorporated
by reference to Exhibit 1(h) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed on January 22, 1997 (File
No. 33-48066).
2. By-Laws of the Registrant as revised and restated October 5, 1992.
Incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A filed via EDGAR on April 4, 1997
(File No. 33-48066).
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by reference to
Exhibits 1 and 2.
5. (a) Management Agreement for Prudential Stock Index Fund with Prudential
Mutual Fund Management LLC. Incorporated by reference to Exhibit 5(e) to
Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A
filed via EDGAR on November 27, 1996 (File No. 33-48066).
(b) Subadvisory Agreement between Prudential Mutual Fund Management LLC
and The Prudential Investment Corporation. Incorporated by reference
to Exhibit 5(f)(i) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on November 27,
1996 (File No. 33-48066).
(c) Management Agreement for Prudential Bond Market Index Fund, Prudential
Europe Index Fund, Prudential Pacific Index Fund and Prudential
Small-Cap Index Fund, with Prudential Investments Fund Management LLC.
Incorporated by reference to Exhibit 5(c) to Post-Effective Amendment
No. 10 to the Registration Statement on Form N-1A filed on January 22,
1997 (File No. 33-48066).
(d) Subadvisory Agreement between Prudental Investments Fund Management
LLC and The Prudential Investment Corporation for Prudential Bond
Market Index Fund, Prudential Europe Index Fund, Prudential Pacific
Index Fund and Prudential Small-Cap Index Fund. Incorporated by
reference to Exhibit 5(d) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed on January 22, 1997 (File
No. 33-48066).
6. (a) Distribution Agreement.*
(b) Form of Selected Dealer Agreement.*
7. Not Applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ----------- ----
<S> <C> <C>
8. Custodian Agreement between the Registrant and State Street Bank and Trust
Company. Incorporated by reference to Exhibit 8 to Post-Effective Amendment
No. 8 to the Registration Statement on Form N-1A filed via EDGAR on April
4, 1997 (File No. 33-48066).
9. Transfer Agency and Service Agreement. Incorporated by reference to Exhibit
9 to Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A filed via EDGAR on April 4, 1997 (File No. 33-48066).
10. (a) Opinion of Arnold & Porter. Incorporated by reference to Exhibit 10(a)
to Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A filed via EDGAR on April 4, 1997 (File No. 33-48066).
(b) Opinion of Morris, Nichols, Arsht & Tunnell. Incorporated by reference
to Exhibit 10(b) to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A filed via EDGAR on April 4, 1997 (File No.
33-48066).
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit 16 to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed via EDGAR on January 30, 1995
(File No. 33-48066).
18. Rule 18f-3 Plan.*
27. Financial Data Schedules for the fiscal year ended September 30, 1998.*
- ------------
* Filed herewith.
</TABLE>
PRUDENTIAL INDEX SERIES FUND
Distribution Agreement
Agreement made as of June 1, 1998, between Prudential Index
Series Fund (the Fund), and Prudential Investment Management Services LLC, a
Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act
of 1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes
and/or series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C, Class Z and Class I
Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the Fund's
Shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes
and/or series of Shares of the Fund it is contemplated that the Fund will adopt
a plan (or plans) of distribution pursuant to Rule 12b-1 under the Investment
Company Act with respect to certain of its classes and/or series of Shares (the
Plans) authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Fund
to act as principal underwriter and distributor of the Fund's Shares, except
that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectuses and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectuses and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the
Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or
all classes and/or series of its Shares at times when redemption is suspended
pursuant to
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the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by
the Fund, shall be promptly advised of all purchase orders for Shares received
by the Distributor. Any order may be rejected by the Fund; provided, however,
that the Fund will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts for such Shares pursuant to the instructions of the Distributor.
Payment shall be made to the Fund in New York Clearing House funds or federal
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so tendered
in accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Shares
shall be paid by the Fund as follows: (i) in the case of Shares subject to a
contingent deferred sales charge, any applicable contingent deferred sales
charge shall be paid to the Distributor, and the balance shall be paid to or for
the account of the redeeming shareholder, in each case in accordance with
applicable provisions of the Prospectus; and (ii) in the case of all other
Shares, proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of any class and/or series of Shares or payment
may be suspended at times when the New York Stock Exchange is closed for other
than customary weekends and holidays, when trading on said Exchange is
restricted, when an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by order,
so permits.
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Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as
the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be required
to amend its Declaration of Trust or By-Laws to comply with the laws of any
state, to maintain an office in any state, to change the terms of the offering
of its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
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Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares which impose
a front-end sales charge, the Distributor shall receive and may retain any
portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose
a contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD.
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Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
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Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any reasonable counsel fees incurred in connection therewith)
which the Distributor, its officers, members or any such controlling person may
incur under the Securities Act, or under common law or otherwise, arising out of
or based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished by
the Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, member or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of trustees or trustees who are
neither "interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and trustees and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its
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Trustees or officers or such controlling person resulting from such claims or
demands shall arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those trustees who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (Independent trustees), cast in
person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent trustees or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the independent
trustees cast in person at a meeting called for the purpose of voting on such
amendment.
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Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Investment Management Services LLC
By: /s/ BRIAN M. STORMS
----------------------------
Brian M. Storms
Executive Vice President
Prudential Index Series Fund
By: /s/ ROBERT F. GUNIA
----------------------------
Robert F. Gunia
Vice President
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii) a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii) licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners, directors,
officers, employees, and agents who will be utilized by Dealer with respect to
its duties and activities under this Agreement is either appropriately licensed
or exempt from such licensing requirements by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to the
Conduct Rules of the NASD and such Conduct Rules shall control any provision to
the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable state
and federal laws and all rules and regulations promulgated thereunder generally
affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds (including those
of each of its classes) only at the regular public offering price applicable to
such Shares and in effect at the time of each transaction. The procedures
relating to all orders and the handling of each order (including the manner of
computing the net asset value of Shares and the effective time of orders
received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is not
authorized to act as broker or agent for, or employee of, Distributor, any Fund
or any other dealer, and Dealer shall not in any manner represent to any third
party that Dealer has such authority or is acting in such capacity. Rather,
Dealer agrees that it is acting as principal for Dealer's own account or as
agent on behalf of Dealer's customers in all transactions in Shares, except as
provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if the
NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or from
Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares only from
Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
c. Dealer agrees to date and time stamp all orders received by Dealer
and promptly, upon receipt of any and all orders, to transmit to Distributor all
orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of
Shares made through Dealer and to furnish Distributor or regulatory authorities
with copies of such records upon request. In that regard, Dealer agrees that,
unless Dealer holds Shares as nominee for its customers or participates in the
NSCC Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor shall
be in Fed Funds, New York clearinghouse or other immediately available funds and
that such funds shall be received by Distributor by the earlier of: (i) the end
of the third (3rd) business day following Dealer's receipt of the customer's
order to purchase such Shares; or (ii) the settlement date established in
accordance with Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended. If such payment is not received by Distributor by such date, Dealer
shall forfeit its right to any concession or commission with respect to such
order, and Distributor reserves the right, without notice, forthwith to cancel
the sale, or, at its option, to sell the Shares ordered back to the Fund, in
which case Distributor may hold Dealer responsible for any loss, including loss
of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
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h. Dealer agrees that it: (i) shall assume responsibility for any loss
to the Fund caused by a correction to any order placed by Dealer that is made
subsequent to the trade date for the order, provided such order correction was
not based on any negligence on Distributor's part; and (ii) will immediately pay
such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of
Shares on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by
mail, telephone, or wire, Dealer shall act as agent for the custodian or trustee
of such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees to
indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for the
purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's
blanket bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the total
sales charges and dealer concessions or commissions, if any, payable to Dealer
shall be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that the sale qualifies for the reduced sales
charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares purchased
in a Qualifying Sale are redeemed within twelve (12) months of the end of the
month of purchase, Distributor shall be entitled to recover any advance payment
attributable to the redeemed Shares by reducing any account payable or other
monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which distribution
plans have been adopted under Rule 12b-1 under the Investment Company Act of
1940, as amended ("Rule 12b-1 Plans"), Distributor also is authorized to pay the
Dealer continuing distribution and/or service fees, as specified in Schedule A
and the relevant Fund Prospectus, with respect to Shares of any such Fund, to
the extent that Dealer provides distribution, marketing, administrative and
other services and activities regarding the promotion of such Shares and the
maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or service
fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be
based on the value of Shares attributable to Dealer's customers and eligible for
such payment, and shall be calculated on the basis of and at the rates set forth
in the compensation schedule then in effect. Without prior approval by a
majority of the outstanding shares of a Fund, the aggregate annual fees paid to
Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's Prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer
A-5
<PAGE>
hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions whereby the
Fund, under all ordinary circumstances, will redeem Shares held by shareholders
on demand. Dealer agrees that it will not make any representations to
shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at a
price below that next quoted by the Fund for redemption or repurchase, i.e., at
the net asset value of such Shares, less any applicable deferred sales charge,
or redemption fee, in accordance with the Fund's Prospectus. Dealer shall,
however, be permitted to sell Shares for the account of the customer or record
owner to the Funds at the repurchase price then currently in effect for such
Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has made,
if instructions in proper form, including any outstanding certificates, are not
received by Distributor within the time customary or the time required by law,
the redemption may be canceled forthwith without any responsibility or liability
on Distributor's part or on the part of any Fund, or Distributor, at its option,
may buy the shares redeemed on behalf of the Fund, in which latter case
Distributor may hold Dealer responsible for any loss, including loss of profit,
suffered by Distributor resulting from Distributor's failure to settle the
redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations concerning Shares of any Fund except those contained in the
Fund's then current Prospectus or in materials provided by Distributor.
A-6
<PAGE>
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and Distributor shall
have no obligation or responsibility with respect to Dealer's right to purchase
or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws regulating
the sale of securities in the United States or any foreign jurisdiction, with
respect to the qualification or status of Dealer or Dealer's personnel selling
Fund Shares. Distributor shall not, in any event, be liable or responsible for
the issue, form, validity, enforceability and value of such Shares or for any
matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in any
foreign jurisdiction, except with the express written consent of Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless Distributor and
the Funds and their predecessors, successors, and affiliates, each current or
former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or regulation (including without limitation the securities laws
and regulations of the United States or any state or foreign country) or any
alleged tort or breach of contract, related to the offer or sale by Dealer of
Shares of the Funds pursuant to this Agreement (except to the extent that
Distributor's negligence or failure to follow correct instructions received from
Dealer is the cause of such loss,
A-7
<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer and
its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of
any claim or complaint or any enforcement action or other proceeding with
respect to Shares offered hereunder against Dealer or its partners, affiliates,
officers, directors, employees or agents, or any person who controls Dealer,
within the meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of (i) any
report filed pursuant to NASD Conduct Rule 3070, including, without limitation
quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed with any
other self-regulatory organization in lieu of Rule 3070 reports pursuant to Rule
3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions
shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement specified
in Section 1.c. of this Agreement, each party to this Agreement may unilaterally
cancel its participation in this Agreement by giving thirty (30) days prior
written notice to the other party. In addition, each party to this Agreement may
terminate this Agreement immediately by giving written notice to the other party
of that other party's material breach of this Agreement. Such notice shall be
deemed to have been given and to be effective on the date on which it was either
delivered personally to the other party or any officer or member thereof, or was
mailed postpaid or delivered to a telegraph office for transmission to the other
party's designated person at the addresses shown herein or in the most recent
NASD Manual.
b. This Agreement shall terminate immediately upon the appointment of a
Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means
shall have no effect upon transactions entered into prior to the effective date
of termination and shall
A-8
<PAGE>
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will terminate
automatically in the event of its "assignment," as defined in the Investment
Company Act of 1940, as amended and the rules, regulations and interpretations
thereunder. The Distributor may, however, transfer any of its duties under this
Agreement to any entity that controls or is under common control with
Distributor.
e. This Agreement may be amended by Distributor at any time by written
notice to Dealer. Dealer's placing of an order or accepting payment of any kind
after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and in
good standing under the laws of the state of Delaware and is duly registered or
exempt from registration as a broker-dealer in all states and jurisdictions in
which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's charter
and by-laws to enter into this Agreement and perform all activities and services
of the Distributor provided for herein and that there are no impediments, prior
or existing, regulatory, self-regulatory, administrative, civil or criminal
matters affecting Distributor's ability to perform under this Agreement.
d. All requisite actions have been taken to authorize Distributor to
enter into and perform this Agreement.
12. Additional Dealer Representations and Warranties
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
A-9
<PAGE>
b. It is empowered under applicable laws and by Dealer's organizational
documents to enter into this Agreement and perform all activities and services
of the Dealer provided for herein and that there are no impediments, prior or
existing, regulatory, self-regulatory, administrative, civil or criminal matters
affecting Dealer's ability to perform under this Agreement.
c. All requisite actions have been taken to authorize Dealer to enter
into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement, subject
to any enforcement or other proceeding with respect to its activities under
state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor have a
debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGs
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only, are not a
party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement shall be binding upon the parties hereto when signed
by Dealer and accepted by Distributor.
A-10
<PAGE>
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be binding
upon the parties hereto when signed by Dealer and accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ____________________________________
Name: __________________________________
Title: _________________________________
Date: __________________________________
DEALER: ________________________________
By: ____________________________________
(Signature)
Name: __________________________________
Title: _________________________________
Address:________________________________
________________________________
________________________________
Telephone: _____________________________
NASD CRD # _____________________________
Prudential Dealer # ____________________
(Internal Use Only)
Date: __________________________________
T:\bible\Index\PIMS-Dealer-Agmnt.doc
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 11 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
November 20, 1998, relating to the financial statements and financial highlights
of Prudential Index Series Fund (consisting of Prudential Pacific Index Fund,
Prudential Stock Index Fund, Prudential Small-Cap Index Fund, Prudential Bond
Market Index Fund and Prudential Europe Index Fund) which appear in such
Statement of Additional Information, and to the incorporation by reference of
our reports into the Prospectuses which constitute part of this Registration
Statement. We also consent to the reference to us under the heading "Custodian,
Transfer and Dividend Disbursing Agent and Independent Accountants" in such
Statement of Additional Information and to the reference to us under the heading
"Financial Highlights" in such Prospectuses.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 24, 1998
PRUDENTIAL INDEX SERIES FUND
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Trustees, including a majority of the independent Trustees. The Fund currently
offers Class I and Class Z Shares.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales
charge and a distribution and/or service fee pursuant to
Rule 12b-1 under the 1940 Act (Rule 12b-1 fee) not to
exceed .30 of 1% per annum of the average daily net
assets of the class. The initial sales charge is waived
or reduced for certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales
charge but are subject to a high contingent deferred
sales charge (declining from 5% to zero over a
six-year period) which will be imposed on certain
redemptions and a Rule 12b-1 fee not to exceed 1% per
annum of the average daily net assets of the class.
The contingent deferred sales charge is waived for
certain eligible investors. Class B shares
automatically convert to Class A shares approximately
seven years after purchase.
CLASS C SHARES: Class C shares issued before October 28, 1998 are not
subject to an initial sales charge but are subject to
a 1% contingent deferred sales charge which will be
imposed on certain redemptions within the first 12
month after purchase and a Rule 12b-1 fee not to
exceed 1% per annum of the average daily net assets
of the class. Class C shares issued on or after
October 28, 1998 are subject to a low initial sales
charge and a 1% contingent deferred sales charge
which will be imposed on certain redemptions within
the first 18 months after purchase and a Rule 12b-1
fee not to exceed 1% per annum of the average daily
net assets of the class.
<PAGE>
Class Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject
to any Rule 12b-1 fee.
Class I SHARES: Class I shares are not subject to either an initial or
contingent deferred sales charge nor are they subject to
any Rule 12b-1 fee. Class I shares are subject to
nominal transfer agency fees or expenses.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class of the Fund will be allocated to each
class of the Fund on the basis of the net asset value of that class in
relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class of the Fund may be different from
that paid by another class of the Fund because of Rule 12b-1 fees and
other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares, Class Z Shares
and Class I Shares shall have such exchange privileges as set forth in the
Fund's current prospectus. Exchange privileges may vary among classes and
among holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any
additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Trustees, including a majority of the independent
Trustees, shall take such action as is
2
<PAGE>
reasonably necessary to eliminate any such conflicts that may develop.
Prudential Investments Fund Management LLC, the Fund's Manager, will be
responsible for reporting any potential or existing conflicts to the
Trustees.
C. For purposes of expressing an opinion on the financial statements of
each Portfolio of the Fund, the methodology and procedures for calculating
the net asset value and dividends/distributions of the Fund's several
classes and the proper allocation of income and expenses among such
classes will be examined annually by the Fund's independent auditors who,
in performing such examination, shall consider the factors set forth in
the relevant auditing standards adopted, from time to time, by the
American Institute of Certified Public Accountants.
Date: February 19, 1997
Amended: June 1, 1998
3
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 47,668,091
<INVESTMENTS-AT-VALUE> 45,098,910
<RECEIVABLES> 8,842,183
<ASSETS-OTHER> 27,508
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 8,838,417
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,340,576
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,694,276
<SHARES-COMMON-STOCK> 3,646,071
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,462,703
<ACCUMULATED-NET-GAINS> 201,810
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,430,819
<NET-ASSETS> (3,646,071)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,038,989
<OTHER-INCOME> 0
<EXPENSES-NET> 134,191
<NET-INVESTMENT-INCOME> 1,904,798
<REALIZED-GAINS-CURRENT> 220,276
<APPREC-INCREASE-CURRENT> 1,430,819
<NET-CHANGE-FROM-OPS> 3,555,893
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (18,466)
<DISTRIBUTIONS-OTHER> (461,718)
<NUMBER-OF-SHARES-SOLD> 38,076,778
<NUMBER-OF-SHARES-REDEEMED> (1,832,230)
<SHARES-REINVESTED> 469,351
<NET-CHANGE-IN-ASSETS> 39,789,508
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83,862
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (36,684)
<AVERAGE-NET-ASSETS> 33,637,000
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 5.52
<PER-SHARE-DIVIDEND> (0.15)
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<EXPENSE-RATIO> 0.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
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<NAME> PRUDENTIAL INDEX SERIES FUND
<SERIES>
<NUMBER> 004
<NAME> EUROPE INDEX FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 17,364,852
<INVESTMENTS-AT-VALUE> 17,946,824
<RECEIVABLES> 282,119
<ASSETS-OTHER> 284
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202,917
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,234,300
<SHARES-COMMON-STOCK> 1,694,799
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 175,125
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 43,155
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 573,730
<NET-ASSETS> (1,694,799)
<DIVIDEND-INCOME> 380,469
<INTEREST-INCOME> 14,880
<OTHER-INCOME> 0
<EXPENSES-NET> 106,974
<NET-INVESTMENT-INCOME> 288,375
<REALIZED-GAINS-CURRENT> 37,994
<APPREC-INCREASE-CURRENT> 573,730
<NET-CHANGE-FROM-OPS> 900,099
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (108,089)
<NUMBER-OF-SHARES-SOLD> 18,141,700
<NUMBER-OF-SHARES-REDEEMED> (1,015,432)
<SHARES-REINVESTED> 108,032
<NET-CHANGE-IN-ASSETS> 16,026,310
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 70,719
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (251,858)
<AVERAGE-NET-ASSETS> 17,728,000
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.71
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.07)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
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<NAME> PACIFIC INDEX FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CIK> 0000887991
<NAME> PRUDENTIAL INDEX SERIES FUND
<SERIES>
<NUMBER> 004
<NAME> SMALL CAP-INDEX FUND (CLASS Z)
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<ARTICLE> 6
<CIK> 0000887991
<NAME> PRUDENTIAL INDEX SERIES FUND
<SERIES>
<NUMBER> 001
<NAME> EUROPE INDEX FUND (CLASS Z)
<S> <C>
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<ARTICLE> 6
<CIK> 0000887991
<NAME> PRUDENTIAL INDEX SERIES FUND
<SERIES>
<NUMBER> 004
<NAME> STOCK INDEX FUND (CLASS I)
<S> <C>
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</TABLE>
