(ICON)
Prudential
Emerging
Growth
Fund, Inc.
SEMI
ANNUAL
REPORT
April 30, 1997
(LOGO)
<PAGE>
Prudential Emerging Growth Fund, Inc.
Performance At A Glance.
Welcome to our first shareholder report for The Prudential Emerging Growth
Fund. The Fund is managed by Portfolio Manager Susan Hirsch, who has more than
21 years of investment experience. This report covers the period since the
Fund's inception on December 31, 1996.
Large-company stock prices continued to climb impressively during the first
four months of 1997, while the performance of small and medium-sized company
stocks trailed. The difference, we believe, was the result of a fear of rising
interest rates, which tends to work against small capitalization stocks more
so than large company stocks. What's more, profit expectations were higher for
many small growth company stocks earlier in the year. Consequently, the
Prudential Emerging Growth Fund, which concentrates on small and mid-cap
growth-type stocks, did not perform as well as the general market. Although
the Fund performed competitively with funds having similar growth objectives,
it trailed the Lipper Analytical Services Mid-Cap Fund average, because the
average includes funds with both value and growth objectives.
<TABLE>
Cumulative
Total Returns1
As of 4/30/97
<CAPTION>
Since Since
Inception2 Inception2
(Without Sales Charge) (With Sales Charge)
<S> <C> <C>
Class A -5.5% -10.2%
Class B -5.8 -10.8
Class C -5.8 -6.8
Class Z -5.4 -5.4
Lipper Mid-Cap
Funds Avg3 -4.5 N/A
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
1Source: Prudential Investments Fund Management and Lipper
Analytical Services. The Fund charges a maximum front-end sales
load of 5% for Class A shares and a declining contingent deferred
sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1% for six years for
Class B shares. Class C shares have a 1% CDSC for one year. Class B
shares will automatically convert to Class A shares on a quarterly
basis, approximately seven years after purchase. Class Z shares are
not subject to a sales charge or a distribution fee. Since
Class A, B, C and Z shares have been in existence less than one
year, no average annual total returns are presented.
2Inception date: 12/31/96 Class A, Class B, Class C and Class Z shares.
3Lipper average returns are for 180 funds since inception on 12/31/96.
How Investments Compared.
(As of 4/30/97)
(GRAPH)
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide 12-
month total returns for several Lipper mutual fund categories to show you that
reaching for higher returns means tolerating more risk. The greater the risk,
the larger the potential reward or loss. In addition, we've included historical
20-year average annual returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments,
state agencies and/or municipalities. This investment provides income that is
usually exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Susan Hirsch, Fund Manager
(PHOTO)
Portfolio
Manager's Report
The Prudential Emerging Growth Fund provides an opportunity for long-term
capital appreciation by investing in stocks of small and medium-sized U.S.
companies with the potential for above-average growth. Stocks of small and
medium-sized companies may offer greater growth potential than those of larger
companies, but may also experience greater day-to-day price fluctuations.
There can be no assurance that the Fund will achieve its investment objective.
It's A Small World.
Historically, the stocks of small and medium-sized companies have performed
better than stocks of larger, more established companies. We look for
companies with above average potential as a result of innovative products or
services. Of course, the prices of these stocks may be more volatile than
those of larger companies.
Strategy Session.
We look for companies with the potential to rapidly grow revenues and earnings
over the next business cycle either as a result of changes at the company or
in its markets. The key is management's ability to execute its plan. Therefore
we want to know and understand management and the financial risks it faces. We
also use quantitative tools to help us measure: 1) the risk and reward
characteristics of each of the fund's holdings, including a valuation model to
measure potential price appreciation, 2) an earnings momentum model to assess
profit revisions and 3) a stability model to assess consistency of growth.
The Fund is managed using a bottom-up investment style. We look for
opportunities in individual stocks regardless of their industries, rather
than starting with industries and then looking for stocks. This strategy
enables us to build a broadly diversified portfolio. As of April 30, we owned
about 100 companies spread across all major sectors of the economy, including
health care, technology, finance and consumer products and services. Our
average market capitalization is about $1.6 billion.
Because the market punished companies harshly if they missed expectations, our
focus shifted to growth companies where expectations were reduced, sometimes
undeservingly.
For example, consider one of our largest holdings:
- - The stock price of American Management Systems, a computer systems company,
fell about 35% in last year's fourth quarter because of a problem project. We
believe the company can rebound from this setback, presenting an exciting long-
term opportunity.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 4/30/97.
(PIE CHART)
<PAGE>
What Went Well.
Nowhere to Run.
Historically, stocks of small and medium-sized companies have performed better
in the long term than larger company stocks. However, such has not been the
case to date this year. We believe this is an aberration, and as we look out
to the rest of the year, we are optimistic that mid-cap stocks will once again
resume their position as leaders in performance.
What was different about this year? At the end of 1996, valuations were high
as were growth expectations. When profit targets were revised downward, stock
prices fell. At the same time, larger companies were meeting or exceeding
their profit goals. So the gap in growth rates between large and small
companies narrowed, while valuations favored the larger companies.
Five Largest Holdings.
2.5% American Management
Systems Inc.
Computer Software
& Services
2.4% Vencor Inc.
Medical Services
1.9% Solectron Corp.
Electronics
1.8% Westpoint Stevens
Apparel & Textiles
1.7% The PMI Group
Insurance
Expressed as a percentage of total investments as of 4/30/97.
And Not So Well.
Nowhere to Hide.
Anticipation of the quarter of a percentage point increase in short-term
interest rates by the Federal Reserve on March 25 exacerbated the situation.
Every sector performed more poorly than the largest company stocks. The key
distinction was primarily size and secondarily investment style. Smaller
growth company stocks were the ones hardest hit.
The situation is now reversed. Valuations are conservative once again. Looking
ahead to 1998, the Fund's holdings are selling at multiples similar to the
general market, although profit growth expectations are 50% to 100% greater.
As a result, we're optimistic.
Looking Ahead.
Despite their poor performance during the first four months of 1997, we are
very optimistic for the long-term potential of emerging growth stocks. We
remain convinced that stocks of small and medium-sized companies at the
earlier stages of their corporate lives offer opportunities unparalleled in
the larger company stock universe. (We must say we were heartened by the
surge in small company stock prices in May, after the close of this reporting
period).
- -------------------------------------------------------------------------------
1
<PAGE>
President's Letter June 9, 1997
(PHOTO)
Staying The Course.
Dear Shareholder:
With the midpoint of 1997 upon us, I'm pleased to report that the recent news
from the financial markets has been decidedly upbeat. The Dow Jones Industrial
Average has gained nearly 17% through mid-June, while lower long-term interest
rates have made bonds an attractive investment.
This stands in contrast to April when the Dow fell 10% from a record high on
fears of higher interest rates and surging inflation. Interest rates have
since fallen as the economy slowed and the Dow has reached several new highs.
The market swings we've seen this year illustrate the importance of "staying
the course" to your financial goal. We realize that maintaining investment
discipline when faced with market uncertainty isn't easy. Here are some
thoughts that may help:
- - Keep Your Expectations Realistic. The best investors know that financial
markets rise and fall -- and so too, will the value of their investments.
Over time, however, stocks have been shown to produce very attractive
returns that were well ahead of inflation.
- - Remember Your Time Horizon. If your investment goals are long term (several
years or more), so should your time horizon. During this period, it's not
unusual for stocks and bonds to experience several periods of market
uncertainty.
- - We're On Your Side. Your Prudential Securities Financial Advisor or Pruco
Securities Registered Representative can help you understand what's
happening in the financial markets. They can assist you in making informed
decisions based upon a thorough knowledge of your financial needs and long-
term goals. Call him or her today.
Thank you for your continued confidence in Prudential mutual funds. We'll do
everything we can to keep you informed and to earn your trust.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- -------------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as
of April 30, 1997
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--98.9%
COMMON STOCKS--98.8%
------------------------------------------------------------
Aerospace--0.5%
30,000 Orbital Sciences Corp. (a) $ 442,500
- ------------------------------------------------------------
Apparel & Textiles--6.7%
20,000 Gucci Group 1,387,500
40,000 Kellwood Co. 950,000
25,000 Liz Claiborne, Inc. 1,131,250
30,000 Warnaco Group, Inc. (The) 855,000
40,000 Westpoint Stevens, Inc. (a) 1,565,000
------------
5,888,750
- ------------------------------------------------------------
Broadcasting--4.7%
40,000 American Radio Systems Corp. (a) 1,170,000
25,000 Clear Channel Communications, Inc.
(a) 1,212,500
40,000 United Video Satellite Group, Inc.
(a) 620,000
30,000 Univision Communications, Inc. (a) 1,020,000
4,900 Westwood One, Inc. (a) 116,988
------------
4,139,488
- ------------------------------------------------------------
Chemicals--4.4%
15,000 BetzDearborn, Inc. 960,000
35,000 OM Group, Inc. 975,625
35,000 Sigma-Aldrich Corp. 1,050,000
15,000 WD-40 Co. 866,250
------------
3,851,875
- ------------------------------------------------------------
Commercial Services--5.5%
15,000 Corrections Corporation of America
(a) 489,375
15,000 Desktop Data Inc. (a) 108,750
30,000 Gartner Group, Inc. (a) 787,500
35,000 MoneyGram Payment Systems, Inc. (a) 341,250
50,600 National Education Corp. (a) 1,024,650
30,000 Omnicare, Inc. 731,250
30,000 Paychex, Inc. 1,404,375
------------
4,887,150
Computer Software & Services--10.0%
25,000 Adobe Systems, Inc. $ 978,125
40,000 Affiliated Computer Services, Inc.
(a) 1,040,000
90,000 American Management Systems, Inc.
(a) 2,227,500
35,000 BISYS Group, Inc. (a) 1,120,000
49,300 DST Systems Inc. (a) 1,398,887
35,500 GTECH Holdings Corp. (a) 1,091,625
60,000 USCS International, Inc. (a) 990,000
------------
8,846,137
- ------------------------------------------------------------
Computer Systems/Peripherals--0.8%
15,000 Seagate Technology, Inc. (a) 688,125
- ------------------------------------------------------------
Cosmetics--0.1%
4,363 ThermoLase Corp. (a) 41,449
- ------------------------------------------------------------
Electronics--18.0%
20,000 Adaptec, Inc. (a) 740,000
26,666 Analog Devices, Inc. (a) 713,316
25,000 Applied Materials, Inc. (a) 1,371,875
45,000 Burr-Brown Corp. (a) 1,327,500
20,000 Cognex Corp. (a) 492,500
15,000 Diebold, Inc. 502,500
30,000 Fusion Systems Corp. (a) 791,250
30,000 Hadco Corp. (a) 1,282,500
50,000 International Rectifier Corp. (a) 575,000
20,000 Linear Technology Corp. 1,005,000
28,900 Solectron Corp. (a) 1,658,137
10,000 Speedfam International, Inc. (a) 242,500
30,000 Tencor Instruments (a) 1,331,250
30,000 Teradyne, Inc. (a) 982,500
35,000 Thermo Instrument System, Inc. (a) 1,098,125
25,000 Thermo Optek Corp. (a) 290,625
60,000 ThermoQuest Corp. (a) 780,000
15,000 Xilinx Inc. (a) 735,000
------------
15,919,578
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as
of April 30, 1997
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Engineering & Construction--0.9%
30,000 Jacobs Engineering Group, Inc. (a) $ 765,000
- ------------------------------------------------------------
Entertainment--1.0%
25,000 Imax Corp. (a) 893,750
- ------------------------------------------------------------
Environmental Services--2.1%
15,000 Ionics, Inc. (a) 690,000
20,000 United Waste Systems, Inc. (a) 675,000
15,000 USA Waste Services, Inc. (a) 491,250
------------
1,856,250
- ------------------------------------------------------------
Financial Services--5.9%
34,500 Delta Financial Corp. (a) 465,750
15,000 Franklin Resources, Inc. 886,875
20,000 Legg Mason, Inc. 950,000
15,000 Peoples Heritage Financial Group,
Inc. 470,625
15,000 Sirrom Capital Corp. 466,875
60,000 Sovereign Bancorp Inc. 735,000
25,200 Washington Mutual, Inc. 1,244,250
------------
5,219,375
- ------------------------------------------------------------
Foods--0.9%
30,000 JP Foodservice, Inc. (a) 836,250
- ------------------------------------------------------------
Insurance--4.2%
20,000 NAC Re Corp. 775,000
1,300 Nationwide Financial Services, Inc.
(a) 34,450
30,000 SunAmerica, Inc. 1,380,000
30,000 The PMI Group, Inc. 1,533,750
------------
3,723,200
- ------------------------------------------------------------
Lodging--1.7%
20,000 Capstar Hotel Co. (a) 567,500
20,000 Four Seasons Hotels, Inc (Canada)
(a) 445,000
15,000 MGM Grand, Inc. (a) 506,250
------------
1,518,750
Medical Services--6.1%
75,000 Beverly Enterprises, Inc. (a) $ 1,087,500
24,700 Genzyme Corp. (a) 571,187
60,000 OccuSystems, Inc. (a) 1,237,500
50,000 Vencor Inc. (a) 2,081,250
20,000 Vitalink Pharmacy Services, Inc.
(a) 367,500
------------
5,344,937
- ------------------------------------------------------------
Medical Technology--5.2%
45,000 Acuson Corp. (a) 1,091,250
10,000 Incyte Pharmaceuticals, Inc. (a) 425,000
15,000 Luxottica Group S.p.A. (Italy)(ADR) 905,625
40,000 Mentor Corp. 925,000
50,000 Sola International, Inc. (a) 1,250,000
------------
4,596,875
- ------------------------------------------------------------
Metals--0.9%
40,000 Worthington Industries, Inc. 755,000
- ------------------------------------------------------------
Oil & Gas--0.9%
20,000 Falcon Drilling Co., Inc. (a) 765,000
- ------------------------------------------------------------
Pharmaceuticals--6.8%
16,900 Biochem Pharma. Inc. (Canada) (a) 303,936
14,900 Copley Pharmaceutical, Inc. (a) 76,363
40,000 Elan Corp. PLC (Ireland)(ADR) (a) 1,360,000
15,000 Liposome Co., Inc. (a) 332,812
45,000 North American Vaccine, Inc.
(Canada) (a) 939,375
50,000 Pharmaceutical Product Development,
Inc. 837,500
22,000 Teva Pharmaceutical Industries Ltd.
(Israel) (ADR) 1,116,500
30,000 Watson Pharmaceuticals, Inc. (a) 1,072,500
------------
6,038,986
- ------------------------------------------------------------
Retail--7.2%
20,000 Consolidated Stores Corp. (a) 800,000
25,000 Dollar General Corp. 790,625
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as
of April 30, 1997
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Retail (cont'd.)
30,000 Kenneth Cole Productions, Inc. (a) $ 498,750
50,000 Neiman Marcus Group, Inc. 1,312,500
15,000 Nine West Group, Inc. (a) 594,375
50,000 OfficeMax Inc. (a) 618,750
50,000 Petco Animal Supplies Inc. (a) 1,068,750
50,000 Stride Rite Corp. 687,500
------------
6,371,250
- ------------------------------------------------------------
Schools--1.1%
30,000 Apollo Group, Inc. (a) 806,250
5,600 Education Management Corp. (a) 123,200
------------
929,450
- ------------------------------------------------------------
Transportation-Road & Rail--2.2%
25,000 Kansas City Southern Industries,
Inc. 1,287,500
20,000 Wisconsin Central Transportation
Corp. (a) 655,000
------------
1,942,500
- ------------------------------------------------------------
Trucking & Shipping--0.2%
10,000 Simon Transportation Services Inc.
(a) 170,000
- ------------------------------------------------------------
Utilities - Electric--0.8%
18,600 Calenergy, Inc. (a) 727,725
------------
Total common stocks
(cost $86,026,938) 87,159,350
------------
<CAPTION>
Units Description Value (Note 1)
<C> <S> <C>
COMMON STOCK UNIT(b)--0.1%
3,168 ThermoLase Corp.
(cost $51,137; value per unit
$16.63; purchased 1997) $ 52,668
------------
Total long-term investments
(cost $86,078,075) 87,212,018
------------
Principal
Amount
(000)
- --------
SHORT-TERM INVESTMENTS--1.8%
JOINT REPURCHASE AGREEMENT
$ 1,604 Joint Repurchase Agreement Account
5.42%, 5/1/97
(cost $1,604,000; Note 5) 1,604,000
------------
- ------------------------------------------------------------
Total Investments--100.7%
(cost $87,682,075; Note 4) 88,816,018
Liabilities in excess of other
assets--(0.7%) (639,793)
------------
Net Assets--100% $ 88,176,225
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Consists of more than one class of securities traded together as a unit;
each unit consists of one common share and one redemption right.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 5
<PAGE>
Statement of Assets and Liabilities
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets April 30, 1997
Investments, at value (cost $87,682,075).................................................................... $ 88,816,018
Cash........................................................................................................ 9,639
Receivable for investments sold............................................................................. 2,335,494
Deferred organization and offering costs (Note 1)........................................................... 224,472
Dividends and interest receivable........................................................................... 25,868
--------------
Total assets............................................................................................. 91,411,491
--------------
Liabilities
Payable for investments purchased........................................................................... 1,653,575
Payable for Fund shares reacquired.......................................................................... 1,335,718
Deferred organization and offering costs payable (Note 1)................................................... 91,445
Accrued expenses............................................................................................ 56,049
Distribution fee payable.................................................................................... 55,849
Management fee payable...................................................................................... 42,630
--------------
Total liabilities........................................................................................ 3,235,266
--------------
Net Assets.................................................................................................. $ 88,176,225
--------------
--------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 9,351
Paid-in capital in excess of par......................................................................... 93,847,019
--------------
93,856,370
Accumulated net investment loss.......................................................................... (401,734)
Accumulated net realized loss on investments............................................................. (6,412,354)
Net unrealized appreciation on investments............................................................... 1,133,943
--------------
Net assets, April 30, 1997.................................................................................. $ 88,176,225
--------------
--------------
Class A:
Net asset value and redemption price per share
($24,060,439 / 2,546,990 shares of common stock issued and outstanding)............................... $9.45
Maximum sales charge (5% of offering price).............................................................. .50
--------------
Maximum offering price to public......................................................................... $9.95
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($59,109,907 / 6,272,964 shares of common stock issued and outstanding)............................... $9.42
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($4,823,941 / 511,928 shares of common stock issued and outstanding).................................. $9.42
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($181,938 / 19,241 shares of common stock issued and outstanding)..................................... $9.46
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996(a)
Through
Net Investment Loss April 30, 1997
<S> <C>
Income
Dividends (net of foreign
withholding taxes of $457)....... $ 90,179
Interest............................ 151,974
-----------
Total income..................... 242,153
-----------
Expenses
Management fee...................... 168,434
Distribution fee--Class A........... 20,507
Distribution fee--Class B........... 182,484
Distribution fee--Class C........... 15,942
Amortization of deferred
organizational and offering
costs............................ 62,527
Custodian's fees and expenses....... 60,000
Transfer agent's fees and
expenses......................... 40,000
Reports to shareholders............. 25,000
Registration fees................... 21,000
Audit fees and expenses............. 18,000
Directors' fees and expenses........ 17,000
Legal fees and expenses............. 12,000
Miscellaneous....................... 993
-----------
Total expenses................... 643,887
-----------
Net investment loss.................... (401,734)
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on investment
transactions........................ (6,412,354)
Net unrealized appreciation on
investments......................... 1,133,943
-----------
Net loss on investments................ (5,278,411)
-----------
Net Decrease in Net Assets
Resulting from Operations.............. $ (5,680,145)
-----------
-----------
- ---------------
(a) Commencement of investment operations.
</TABLE>
PRUDENTIAL EMERGING GROWTH FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996(a)
Increase (Decrease) Through
in Net Assets April 30, 1997
<S> <C>
Operations
Net investment loss................. $ (401,734)
Net realized loss on investments.... (6,412,354)
Net unrealized appreciation on
investments...................... 1,133,943
--------------------
Net decrease in net assets resulting
from operations.................. (5,680,145)
--------------------
Fund share transactions (net of share
conversion) (Note 6)
Net proceeds from Fund shares
sold............................. 101,471,348
Cost of shares reacquired........... (7,714,978)
--------------------
Net increase in net assets from Fund
share transactions............... 93,756,370
--------------------
Total increase......................... 88,076,225
Net Assets
Beginning of period.................... 100,000
--------------------
End of period.......................... $ 88,176,225
--------------------
--------------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Prudential Emerging Growth Fund, Inc. (the 'Fund'), is registered under the
Investment Company Act of 1940, as a diversified, open-end management investment
company. The Fund was incorporated in Maryland on August 23, 1996. The Fund
issued 2,500 shares of Class A, Class B, Class C and Class Z common stock for
$100,000 on October 21, 1996 to Prudential Investments Fund Management LLC
('PIFM'). Investment operations commenced on December 31, 1996.
The Fund's investment objective is to achieve long-term capital appreciation by
investing primarily in equity securities of small and medium sized U.S.
companies, ranging from $500 million to $4.5 billion in market capitalization,
with the potential for above-average growth.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments, listed on a securities exchange and NASDAQ
National Market System securities (other than options on stock and stock
indices) are valued at the last sales price on the day of valuation, or, if
there was no sale on such day, mean between the last bid and asked prices on
such day, as provided by a pricing service. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Options on stock and stock indices traded on an exchange are valued at the mean
between the most recently quoted bid and asked prices provided by the respective
exchange. Futures contracts and options thereon are valued at the last sales
price as of the close of business of the exchange. Securities for which reliable
market quotations are not available or for which the pricing agent or principal
market maker does not provide a valuation will be valued at fair value
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be, under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
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.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
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 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 the settlement date of
the contract equal to the difference between the 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
counterparties to meet the terms of their contracts. There were no open foreign
currency contracts at April 30, 1997.
Dividends and Distributions: Dividends from net investment income are declared
and paid annually. The Fund will distribute at least annually net capital gains
in excess of loss carryforwards, if any. 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.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a
- --------------------------------------------------------------------------------
-----
8
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
short sale if the market price at termination is less than or greater than,
respectively, the proceeds originally received.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income 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 Organization Expenses: Approximately $122,000 of expenses were incurred
in connection with the organization of the Fund. These costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with 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 Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .60 of 1% of the average daily net assets of the Fund.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees for are accrued daily and payable
monthly. No distribution or service fees are paid to PSI as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plan were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the period December 31,
1996 through April 30, 1997.
PSI has advised the Fund that it has received approximately $122,700 in
front-end sales charges resulting from sales of Class A shares for the period
December 31, 1996 through April 30, 1997. From these fees, PSI paid such sales
charges to dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PSI advised the Fund that for the period December 31, 1996 through April 30,
1997, it received approximately $26,600 and $2,500 in contingent deferred sales
charges imposed upon certain redemptions by certain Class B and Class C
shareholders, respectively.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. 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 as of April 30,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portio of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
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 April 30, 1997, the
Fund incurred fees of approximately $39,000 for the services of PMFS. As of
April 30, 1997, approximately $11,000 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 non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended April 30, 1997 were $126,988,890 and $34,498,113,
respectively.
The cost basis of investments for federal income tax purposes at April 30, 1997,
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation of investments for federal income tax purposes was
$1,133,943 (gross unrealized appreciation--$5,637,818; gross unrealized
depreciation--$4,503,875).
- ------------------------------------------------------------
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 April 30, 1997, the Fund
had a .20% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund
- --------------------------------------------------------------------------------
-----
9
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
represented $1,604,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the value of the collateral therefor were as
follows:
CS First Boston Corp., 5.50% dated 4/30/97, in the principal amount of
$208,000,000, repurchase price $208,031,778, due 5/1/97. The value of the
collateral including accrued interest is $214,501,123.
J.P. Morgan Securities, 5.42% dated 4/30/97, in the principal amount of
$208,000,000, repurchase price $208,031,316, due 5/1/97. The value of the
collateral including accrued interest is $212,160,231.
SBC Warburg, 5.30% dated 4/30/97, in the principal amount of $144,000,000,
repurchase price $144,021,200, due 5/1/97. The value of the collateral including
accrued interest is $146,969,072.
Smith Barney Inc., 5.25% and 5.44%, both dated 4/30/97, in the principal amount
of $43,121,000 and $208,000,000 respectively, repurchase price $43,127,288 and
$208,031,431 respectively, due 5/1/97. The value of the combined collateral
including accrued interest is $256,144,337.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase. A special exchange privilege is also available for shareholders who
qualified to purchase Class A shares at net asset value. Class Z shares are not
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.
There are 2 billion shares of $.001 par value common stock authorized divided
into four classes, designated Class A, Class B, Class C and Class Z, each of
which consists of 1 billion, 500 million, 300 million and 200 million authorized
shares, respectively.
Transactions in shares of common stock for the period December 31, 1996
(commencement of operations) through April 30, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
December 31, 1996* through
April 30, 1997:
Shares sold......................... 3,024,762 $ 30,142,219
Shares reacquired................... (480,363) (4,606,125)
---------- ------------
Net increase in shares outstanding
before conversion................. 2,544,399 25,536,094
Shares issued upon conversion from
Class B........................... 91 885
---------- ------------
Net increase in shares
outstanding....................... 2,544,490 $ 25,536,979
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
December 31, 1996* through
April 30, 1997:
Shares sold......................... 6,555,048 $ 65,663,253
Shares reacquired................... (284,493) (2,716,426)
---------- ------------
Net increase in shares outstanding
before conversion................. 6,270,555 62,946,827
Shares reacquired upon conversion
into Class A...................... (91) (885)
---------- ------------
Net increase in shares
outstanding....................... 6,270,464 $ 62,945,942
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
December 31, 1996* through
April 30, 1997:
Shares sold......................... 544,182 $ 5,446,962
Shares reacquired................... (34,754) (336,784)
---------- ------------
Net increase in shares
outstanding....................... 509,428 $ 5,110,178
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
<S> <C> <C>
December 31, 1996* through
April 30, 1997:
Shares sold......................... 22,690 $ 218,914
Shares reacquired................... (5,949) (55,643)
---------- ------------
Net increase in shares
outstanding....................... 16,741 $ 163,271
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
-----
10
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL EMERGING GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
------------ ------------ ------------
December 31, December 31, December 31,
1996(a) 1996(a) 1996(a)
Through Through Through
April 30, April 30, April 30,
1997 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 10.00 $ 10.00 $ 10.00
------------ ------------ ------------
Income from investment operations
Net investment loss...................................................... (.03) (.05) (.05)
Net realized and unrealized loss on investment transactions.............. (.52) (.53) (.53)
------------ ------------ ------------
Total from investment operations...................................... (.55) (.58) (.58)
------------ ------------ ------------
Net asset value, end of period........................................... $ 9.45 $ 9.42 $ 9.42
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN(c):......................................................... (5.50)% (5.80)% (5.80)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 24,060 $ 59,110 $ 4,824
Average net assets (000)................................................. $ 24,743 $ 55,047 $ 4,809
Ratios to average net assets(b):
Expenses, including distribution fees................................. 1.76% 2.51% 2.51%
Expenses, excluding distribution fees................................. 1.51% 1.51% 1.51%
Net investment loss................................................... (.87)% (1.67)% (1.63)%
Portfolio turnover....................................................... 41% 41% 41%
Average commission rate paid per share................................... $ 0.0498 $ 0.0498 $ 0.0498
<CAPTION>
Class Z
------------
December 31,
1996(a)
Through
April 30,
1997
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 10.00
------------
Income from investment operations
Net investment loss...................................................... (.01)
Net realized and unrealized loss on investment transactions.............. (.53)
------------
Total from investment operations...................................... (.54)
------------
Net asset value, end of period........................................... $ 9.46
------------
------------
TOTAL RETURN(c):......................................................... (5.40)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 182
Average net assets (000)................................................. $ 82
Ratios to average net assets(b):
Expenses, including distribution fees................................. 1.51%
Expenses, excluding distribution fees................................. 1.51%
Net investment loss................................................... (.87)%
Portfolio turnover....................................................... 41%
Average commission rate paid per share................................... $ 0.0498
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 11
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Susan C. Cote, Vice President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
The accompanying financial statements as of April 30, 1997 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
BULK RATE
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