<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. [_]
(Check appropriate box or boxes)
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PRUDENTIAL JENNISON FUND, INC.
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service of Process)
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 ON JULY 25, 1996,
PURSUANT TO RULE 488 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NO FILING FEE IS REQUIRED BECAUSE, PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940, REGISTRANT HAS PREVIOUSLY REGISTERED AN
INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE,
PURSUANT TO A REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 33-61997). THE
REGISTRANT WILL FILE A NOTICE UNDER RULE 24f-2 FOR ITS FISCAL YEAR ENDING
SEPTEMBER 30, 1996 ON OR ABOUT NOVEMBER 29, 1996.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A) UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-14 ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
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PART A
<C> <S> <C>
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of Prospectus.... Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus................................ Table of Contents
Item 3. Fee Table, Synopsis Information and Risk Synopsis; Principal Risk
Factors................................... Factors
Item 4. Information about the Transaction......... Synopsis; The Proposed
Transaction
Item 5. Information about the Registrant.......... Synopsis; Information
about Jennison Fund;
Miscellaneous
Item 6. Information about the Company Being
Acquired.................................. Synopsis; Information
about Growth Stock Fund;
Miscellaneous
Item 7. Voting Information........................ Synopsis; Voting
Information
Item 8. Interest of Certain Persons and Experts... Synopsis; Miscellaneous
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters.............................. Not Applicable
<CAPTION>
PART B STATEMENT OF ADDITIONAL
INFORMATION CAPTION
-----------------------
<C> <S> <C>
Item 10. Cover Page................................ Cover Page
Item 11. Table of Contents......................... Cover Page
Item 12. Additional Information about the
Registrant................................ Statement of Additional
Information of Prudential
Jennison Fund, Inc. dated
October 27, 1995 (as
supplemented April 15,
1996); Semi-Annual Report
to Shareholders of
Prudential Jennison Fund,
Inc. for the six months
ended March 31, 1996
Item 13. Additional Information about the Company
Being Acquired............................ Not Applicable
Item 14. Financial Statements...................... Financial Statements as
noted in the Statement of
Additional Information
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PRELIMINARY COPY
THE PRUDENTIAL INSTITUTIONAL FUND--GROWTH STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
----------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (Meeting) of
Growth Stock Fund (Growth Stock Fund), a portfolio of The Prudential
Institutional Fund, will be held at 9:00 a.m., eastern time, on September 6,
1996, at 21 Prudential Plaza, 751 Broad Street, Newark, New Jersey 07102-3777,
for the following purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of Growth Stock Fund will be transferred to
Prudential Jennison Fund, Inc. (Jennison Fund) in exchange solely for Class
Z shares of Jennison Fund, and Jennison Fund's assumption of all of the
liabilities, if any, of Growth Stock Fund; and
2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.
Only holders of shares of Growth Stock Fund of record at the close of
business on July 12, 1996, are entitled to notice of and to vote at this
Meeting or any adjournment thereof.
S. Jane Rose
Secretary
Dated: July , 1996
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED STAMPED SELF-ADDRESSED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
PROSPECTUS
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
AND
THE PRUDENTIAL INSTITUTIONAL FUND--GROWTH STOCK FUND
PROXY STATEMENT
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
----------------
The Prudential Institutional Fund (PIF) is an open-end, diversified
management investment company consisting of seven portfolios, one of which is
the Growth Stock Fund (Growth Stock Fund). Prudential Jennison Fund, Inc.
(Jennison Fund) is an open-end, diversified management investment company.
Both PIF and Jennison Fund are managed by indirect wholly-owned subsidiaries
of The Prudential Insurance Company of America. Growth Stock Fund is managed
by Prudential Institutional Fund Management, Inc. (PIFM). Jennison Fund is
managed by Prudential Mutual Fund Management, Inc. Growth Stock Fund and
Jennison Fund (collectively, the Funds) each have an investment objective of
long-term growth of capital, and each seek to achieve its objective by
investing primarily in equity securities of established companies with above-
average growth prospects. Current income, if any, is incidental to each Fund's
objective.
This Prospectus and Proxy Statement is being furnished to shareholders of
Growth Stock Fund in connection with the solicitation of proxies by PIF's
Board of Trustees for use at a special meeting of Growth Stock Fund
shareholders to be held on September 6, 1996, at 9:00 a.m., eastern time, and
at any adjournment thereof (Meeting). The primary purpose of this Meeting is
to vote on a proposed Agreement and Plan of Reorganization and Liquidation
(the Plan), whereby Jennison Fund will acquire all of the assets of Growth
Stock Fund and assume all of the liabilities, if any, of Growth Stock Fund. If
the Plan is approved by Growth Stock Fund's shareholders, and if an order of
exemption from certain provisions of the Investment Company Act of 1940 is
received from the Securities and Exchange Commission (SEC), all such
shareholders will be issued Class Z shares of Jennison Fund in exchange for
the shares of Growth Stock Fund held by them, and Growth Stock Fund will be
liquidated. Shareholders of Jennison Fund are not being asked to vote on the
Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Jennison Fund that prospective investors should know before investing.
Additional information contained in a Statement of Additional Information
(SAI) dated July 25, 1996, relating to the Plan and including financial
statements, has been filed with the SEC, is incorporated herein by reference
and is available without charge upon request to the address or telephone
number shown above. This Prospectus and Proxy Statement is accompanied by the
Class Z Prospectus of Jennison Fund dated April 15, 1996. The Jennison Fund
SAI dated October 27, 1995 (as supplemented April 15, 1996) also has been
filed with the SEC and is incorporated by reference herein. A Prospectus for
PIF dated February 1, 1996, including a May 30, 1996 supplement thereto, and
an SAI for PIF dated February 1, 1996 also have been filed with the SEC and
are incorporated by reference herein. The Jennison Fund Prospectus and SAI are
available without charge upon written request to Prudential Mutual Fund
Services, Inc., Raritan Plaza One, Edison, New Jersey 08837 or by calling the
toll-free number shown above. The PIF Prospectus and SAI of PIF are available
without charge upon request to PIF at the address or toll-free numbers shown
above.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is July 25, 1996.
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
THE PRUDENTIAL INSTITUTIONAL FUND--GROWTH STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
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PROSPECTUS AND PROXY STATEMENT DATED JULY 25, 1996
----------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation (the Plan) and is qualified by reference to the
more complete information contained herein as well as in each of The
Prudential Institutional Fund (PIF)--Growth Stock Fund (Growth Stock Fund)
Prospectus and the enclosed Prudential Jennison Fund, Inc. (Jennison Fund)
Prospectus. Shareholders should read the entire Prospectus and Proxy Statement
carefully.
GENERAL
This Prospectus and Proxy Statement is furnished by the Board of Trustees of
PIF in connection with the solicitation of proxies for use at a Special
Meeting of Shareholders of Growth Stock Fund (the Meeting) to be held at 9:00
a.m., eastern time, on September 6, 1996 at 21 Prudential Plaza, 751 Broad
Street, Newark, New Jersey 07102-3777, PIF's principal executive office. The
purpose of the Meeting is to approve or disapprove the Plan, pursuant to which
all of the assets of Growth Stock Fund will be acquired by, and all of the
liabilities of Growth Stock Fund, if any, will be assumed by, Jennison Fund,
and to transact such other business as may properly come before the Meeting or
any adjournment thereof. The Plan is attached to this Prospectus and Proxy
Statement as Appendix A. The transactions contemplated by the Plan are
described herein and in summary provide that Jennison Fund will acquire the
assets, in exchange solely for Class Z shares of Jennison Fund, and assume all
of the liabilities, if any, of Growth Stock Fund.
Approval of the Plan requires the affirmative vote of a majority of the
shares of Growth Stock Fund entitled to vote at the Meeting. Approval of the
Plan by the shareholders of Jennison Fund is not required, and the Plan is not
being submitted for their approval.
THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of Trustees of PIF and the Board of Directors of Jennison Fund
(each a Board) have approved the Plan, which provides for the transfer of all
of the assets of Growth Stock Fund to Jennison Fund in exchange solely for
Class Z shares of Jennison Fund and the assumption by Jennison Fund of all of
the liabilities, if any, of Growth Stock Fund. If approved by Growth Stock
Fund shareholders, and if an order of exemption (Exemption Order) from certain
provisions of the Investment Company Act of 1940 (Investment Company Act) is
received from the SEC, Class Z shares of Jennison Fund will be distributed to
shareholders of Growth Stock Fund, and Growth Stock Fund will be liquidated.
(All of the foregoing transactions are sometimes referred to herein as the
Reorganization.) The Reorganization will become effective as soon as
practicable after the Meeting. EACH GROWTH STOCK FUND SHAREHOLDER WILL RECEIVE
THE NUMBER OF FULL AND FRACTIONAL CLASS Z SHARES OF
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JENNISON FUND (ROUNDED TO THE THIRD DECIMAL PLACE) REPRESENTING AN AMOUNT
EQUAL TO THE VALUE OF SUCH SHAREHOLDERS' SHARES OF GROWTH STOCK FUND AS OF THE
CLOSING DATE OF THE REORGANIZATION, WHICH IS EXPECTED TO OCCUR ON OR ABOUT
SEPTEMBER 20, 1996 (THE CLOSING DATE).
For the reasons set forth below under "--Reasons for the Proposed
Reorganization" and "The Proposed Transaction--Reasons for the
Reorganization," each Board, including those Trustees/Directors who are not
"interested persons" (Independent Trustees/Directors) as that term is defined
in the Investment Company Act, has determined that the Reorganization is in
the best interests of the shareholders of Growth Stock Fund and Jennison Fund
(the Funds) and that the interests of the existing shareholders of each Fund
will not be diluted as a result of the Reorganization. ACCORDINGLY, THE BOARD
OF PIF RECOMMENDS APPROVAL OF THE PLAN.
REASONS FOR THE PROPOSED REORGANIZATION AND LIQUIDATION
The Board of PIF has concluded, based on information presented by Growth
Stock Fund's Manager, Prudential Institutional Fund Management, Inc. (PIFM),
that approval of the Reorganization is in the best interests of Growth Stock
Fund and its shareholders. The following are among the reasons for the
Reorganization.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL) HAS CONSOLIDATED
ITS ASSET MANAGEMENT BUSINESS INTO ONE UNIT, THE MONEY MANAGEMENT GROUP. The
Money Management Group of Prudential was formed in November 1995 as part of a
major corporate restructuring initiated by Arthur Ryan, Chairman and Chief
Executive Officer of Prudential. All of Prudential's money management
businesses are part of this group, which will develop products and manage
assets for all of Prudential's fee-based, marketable securities businesses,
including mutual funds, annuities, defined contribution and benefit plans,
guaranteed products and retirement administration.
One goal of the Money Management Group is to present one group of mutual
funds to the marketplace, i.e., a "brand" identity. Another goal is to achieve
cost savings. In light of these goals, the Money Management Group undertook a
broad review of the Prudential Mutual Fund Family to see if any changes were
advisable. The consolidation of certain mutual funds that were substantially
similar appeared consistent with attaining the above stated goals, as well as
beneficial to the funds and shareholders involved.
THE PROPOSED REORGANIZATION IS SUITABLE FOR GROWTH STOCK FUND AND JENNISON
FUND BECAUSE OF A NUMBER OF SIMILARITIES BETWEEN JENNISON FUND AND GROWTH
STOCK FUND. Each Fund is an open-end, diversified management investment
company (or a portfolio thereof). Each Fund seeks long-term growth of capital
by investing primarily in equity securities of established companies with
above-average growth prospects. Current income, if any, is incidental to each
Fund's objective. Jennison Associates Capital Corp. (Jennison Associates)
serves as subadviser to both Funds and the portfolio holdings of both Funds
are substantially the same. In addition, Prudential Mutual Fund Services, Inc.
(PMFS) serves as Transfer Agent and Dividend Disbursing Agent to both Funds;
and State Street Bank and Trust Company serves as Custodian to both Funds.
David Poiesz, a Director and Senior Vice President of Jennison Associates,
is responsible for the day-to-day portfolio management of each Fund. Mr.
Poiesz has managed the portfolio of the Growth Stock Fund since its inception
in November 1992 and the portfolio of Jennison Fund since its inception in
October 1995. Mr. Poiesz joined Jennison Associates in 1983 and has been an
equity portfolio manager since 1991. Peter Reinemann is the
3
<PAGE>
associate portfolio manager of Jennison Fund and assists Mr. Poiesz. Mr.
Reinemann also is a Senior Vice President and Director of Jennison Associates.
Mr. Reinemann has been with Jennison Associates since 1992 as an associate
portfolio manager and prior thereto he served as a Vice President at Paribas
Asset Management, Inc.
Growth Stock Fund was established to meet the needs of institutional
investors looking for long-term growth of capital. Jennison Fund initially was
established to meet the needs of individual investors looking for long-term
growth of capital. When Jennison Fund created a new class of shares, the Class
Z shares, which, like the Growth Stock Fund shares, carries no load or
distribution expenses, it became apparent that one Fund was sufficient to meet
the needs of both institutional and individual investors looking for long-term
growth of capital. Given the almost identical investment objective and
investment policies of the Funds, it is believed that combining the asset base
of the Funds and the management efforts under one manager, while maintaining
the expertise of the Funds' investment adviser, Jennison Associates, may
result in economies of scale to the benefit of the Funds and their respective
shareholders.
Although each Fund currently incurs different expenses, Prudential Mutual
Fund Management, Inc. (PMF) believes that should the proposed Reorganization
be approved, the total operating expenses of Jennison Fund's Class Z shares
will be approximately the same or less than the total operating expenses
currently realized by Growth Stock Fund. With respect to the Growth Stock
Fund, PIFM has agreed until September 30, 1996, to bear any expenses,
including management fees, which would cause the ratio of expenses payable by
Growth Stock Fund to exceed 1.00%. As of September 30, 1995, other expenses
were .31%, of which PIFM subsidized .01%. Total operating expenses after such
reduction were 1.00%. At April 15, 1996, estimated total operating expenses
for Jennison Fund's Class Z shares for the fiscal year ending September 30,
1996, are 1.12%. However, management fees and other expenses, which are the
only expenses that Jennison Fund Class Z shares are anticipated to incur, were
.93% (annualized) for the five months ended March 31, 1996. This suggests that
actual costs incurred are less than those originally estimated. Jennison Fund
Class Z shares were initially offered on March 1, 1996. See "Information About
Jennison Fund--Financial Information" below. Other expenses of Jennison Fund
are not currently subsidized by PMF. PMF believes, however, that, should the
proposed merger be approved, the combination of the assets will provide
economies of scale to Jennison Fund which will enable the Class Z shares of
Jennison Fund to have total operating expenses of approximately .90%.
In addition, the combination of Growth Stock Fund and Jennison Fund would
eliminate certain duplicative expenses, such as Trustees' fees and those
incurred in connection with separate audits and the preparation of separate
financial statements for each Fund. Accordingly, in view of such duplicative
efforts by maintaining two similar funds, the PIF Board has concluded that it
would be appropriate and in the best interests of Growth Stock Fund and its
shareholders to combine the two Funds, with Jennison Fund as the survivor. See
also "The Proposed Transaction--Reasons for the Reorganization" below.
STRUCTURE OF GROWTH STOCK FUND AND JENNISON FUND
PIF was established as a Delaware business trust on May 11, 1992. PIF
currently consists of seven investment funds, one of which is Growth Stock
Fund. Growth Stock Fund commenced investment operations on November 5, 1992.
Since that time its net assets have grown to approximately $289 million at
March 31, 1996. The Trustees are responsible for the overall management and
supervision of Growth Stock Fund's business affairs. PIFM conducts and
supervises the daily business operations of PIF. PIF is authorized to issue an
unlimited number of shares of beneficial interest, $.001 par value per share.
Each Growth Stock Fund share issued has a pro-rata interest in the assets of
Growth Stock Fund and has no interest in the assets of any other
4
<PAGE>
series of PIF. Growth Stock Fund bears its own liabilities and its
proportional share of the general liabilities of PIF and is not responsible
for the liabilities of any other series of PIF. The Board is empowered by
PIF's Declaration of Trust and By-Laws to establish additional series and
classes of shares.
Jennison Fund was incorporated as a Maryland Corporation on August 10, 1995.
Jennison Fund commenced investment operations on November 2, 1995 and had net
assets of approximately $241 million at March 31, 1996. Jennison Fund has a
Board of Directors that is responsible for the overall management and
supervision of Jennison Fund's business affairs. Jennison Fund is authorized
to offer 2.5 billion shares of common stock, $.001 par value per share. Shares
of Jennison Fund are divided into four classes, designated Class A, Class B,
Class C and Class Z. Of the authorized shares of common stock, 1 billion
shares consist of Class A common stock, 500 million shares consist of Class B
common stock, 500 million shares consist of Class C common stock and 500
million shares consist of Class Z common stock. Each class of shares
represents an interest in the same assets of Jennison Fund and is identical in
all respects except that (i) each class is subject to different sales charges
and distribution and/or service fees, (except for Class Z shares, which are
not subject to any distribution and/or service fee) which may affect
performance, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its distribution arrangements
and has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class,
(iii) each class has a different exchange privilege, (iv) only Class B shares
have a conversion feature and (v) Class Z shares are currently offered
exclusively for sale to participants in the PSI 401(k) Plan. Since Class B and
Class C shares generally bear higher distribution expenses than Class A shares
and Class Z shares, which bear no distribution and service fees, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fee. In accordance with each Fund's
Articles of Incorporation or Declaration of Trust, as the case may be, the
Board may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Directors may determine.
The Board of each Fund may increase or decrease the number of authorized
shares without shareholder approval. Shares of each Fund, when issued are
fully paid, nonassessable, fully transferable and redeemable at the option of
the holder. Shares also are redeemable at the option of each Fund under
certain circumstances. Except for the conversion feature applicable to Class B
shares of Jennison Fund (which convert to Class A shares after approximately
seven years), there are no conversion, preemptive or other subscription
rights. In the event of liquidation of either Fund, each share thereof is
entitled to its portion of that Fund's assets after all of that Fund's debts
and expenses have been paid. Neither Fund's shares have cumulative voting
rights for the election of its respective Trustees/Directors.
INVESTMENT OBJECTIVE AND POLICIES
Jennison Fund's investment objective and policies are substantially similar
to Growth Stock Fund's investment objective and policies. Should the proposed
Reorganization be consummated, it is anticipated that the Jennison Fund's
investment objective and policies, and it is anticipated that its portfolio
composition, will remain substantially the same.
Each Fund's objective is long-term growth of capital. Each Fund seeks to
achieve its objective by investing primarily in equity securities (common
stock, preferred stock and securities convertible into common stock) of
established companies with above-average growth prospects. Current income, if
any, is incidental. Under normal market conditions, each Fund intends to
invest at least 65% of its total assets in equity securities of companies
5
<PAGE>
that exceed $1 billion in market capitalization. Each Fund also may invest in
(1) equity securities of other companies including foreign issuers, (2)
investment grade fixed-income securities and (3) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
including mortgage-backed securities. Each Fund may engage in various
derivative securities transactions, such as options on stocks, stock indices
and foreign currencies, foreign currency exchange contracts and the purchase
and sale of futures contracts on stock indices and options thereon to hedge
its portfolio and to attempt to enhance return.
CERTAIN DIFFERENCES BETWEEN GROWTH STOCK FUND AND JENNISON FUND
While the investment objective and policies of both Funds are similar, there
are a few differences between the Funds.
First, although the subadviser for each Fund is the same, each Fund has a
different manager. PIFM, whose principal business address is 30 Scranton
Office Park, Moosic, Pennsylvania 18507-1789, is manager of the Growth Stock
Fund. PIFM was incorporated in May 1992 under the laws of the Commonwealth of
Pennsylvania and is an indirect wholly owned subsidiary of Prudential, one of
the largest diversified insurance and financial services institutions in the
world. PMF, whose principal business address is One Seaport Plaza, New York,
New York 10292-1025, currently serves as manager of Jennison Fund, as well as
Administrator to Growth Stock Fund. PMF was incorporated in May 1987 under the
laws of the State of Delaware and also is a wholly owned subsidiary of
Prudential. As of June 30, 1996, PMF served as the manager or administrator to
investment companies, including mutual funds, with aggregate assets of
approximately $ billion. Should the proposed Reorganization be approved
Growth Stock Fund's assets would be transferred to Jennison Fund and would be
managed by PMF.
Second, the management fee paid to PMF by Jennison Fund is .10% lower than
the management fee paid to PIFM by Growth Stock Fund. Pursuant to a management
agreement between PMF and Jennison Fund, Jennison Fund currently pays a
management fee of .60% of the Fund's average daily net assets. Pursuant to a
management agreement between PIFM and Growth Stock Fund, Growth Stock Fund
currently pays a management fee of .70% of the Fund's average daily net
assets.
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the manager of Growth Stock Fund, is compensated,
pursuant to a management agreement with PIF, on behalf of Growth Stock Fund,
at an annual rate of .70 of 1% of the average daily net assets of Growth Stock
Fund. PMF, the manager of Jennison Fund, is compensated, pursuant to a
management agreement with Jennison Fund, at an annual rate of .60 of 1% of the
average daily net assets of Jennison Fund.
Under subadvisory agreements between Jennison Associates and each of PIFM
and PMF, with respect to the Growth Stock Fund and Jennison Fund,
respectively, Jennison Associates, as Subadviser provides investment advisory
services for the management of each Fund. Pursuant to the respective
subadvisory agreements, PIFM compensates Jennison Associates for its services
at the annual rate of .30 of 1% of Growth Stock Fund's average daily net
assets, and PMF compensates Jennison Associates for its services at the annual
rate of .30 of 1% of Jennison Fund's average daily net assets up to and
including $300 million and .25 of 1% of Jennison Fund's average daily net
assets in excess of $300 million. PIFM and PMF each continues to have
responsibility for all investment advisory services pursuant to its respective
management agreement and supervises the Subadviser's performance of its
services on behalf of each respective Fund.
6
<PAGE>
DISTRIBUTION FEES. Prudential Retirement Services, Inc. (PRSI), 751 Broad
Street, Newark, New Jersey 07102, an affiliate of PIFM and a corporation
organized under the laws of New Jersey, serves at no fee as the distributor of
shares of Growth Stock Fund.
Prudential Securities Incorporated (PSI), One Seaport Plaza, New York, New
York 10292, serves as the distributor for Class Z shares of Jennison Fund. PSI
is a wholly owned subsidiary of The Prudential and a corporation organized
under the laws of the State of Delaware. No distribution or service fees are
paid to PSI by Jennison Fund's Class Z shares.
ADMINISTRATION FEES. PIF has entered into an administration, transfer agency
and service agreement (Administration Agreement) with PMF, which provides that
PMF furnishes to Growth Stock Fund such services as Growth Stock Fund may
require in connection with administration of its business affairs. Under the
Administration Agreement, PIF pays PMF a monthly fee at an annual rate of .17%
of the average daily net assets of PIF up to $250 million and .15% of its
average daily net assets in excess of $250 million. PMF also provides Growth
Stock Fund with transfer agent and dividend disbursing services for no
additional fee, through its wholly owned subsidiary, Prudential Mutual Fund
Services, Inc., Raritan Plaza One, Edison, New Jersey 08837.
Jennison Fund has no separate fee for administrative services, but does use
PMFS to furnish transfer agent and dividend disbursing services. Jennison
Fund, pursuant to a Transfer Agency Agreement, pays PMFS an annual fee per
shareholder account of $9.50, a new account set-up fee for each manually
established account of $2.00 and a monthly inactive zero balance account fee
per shareholder's account of $0.20. PMFS also is reimbursed for its out-of-
pocket expenses, including postage, stationery, printing, allocable
communications expenses and other costs.
OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, legal, audit and share
registration expenses.
FEE WAIVERS AND SUBSIDY. PIFM and PMF each 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 each Fund. Fee waivers and expense subsidies will
increase a Fund's yield and total return. PSI, the distributor of the Jennison
Fund shares, also may from time to time waive all or a portion of the
distribution expenses payable to it under one or more of Jennison Fund's 12b-1
Plans. Any fee waiver or subsidy may be terminated at any time without notice,
after which a Fund's expenses may increase and its yield and total return may
be reduced.
EXPENSE RATIOS. For the fiscal year ended September 30, 1995, total expenses
stated as a percentage of average net assets of Growth Stock Fund were 1.01%
before reduction of expenses by PIFM and 1.00% after reduction of expenses.
PIFM has agreed, until September 30, 1996, to bear any expenses that would
cause the ratio of expenses payable by Growth Stock Fund to exceed 1%.
Expenses paid or assumed by PIFM are subject to recoupment by PIFM in later
years, provided that (a) no recoupment will be made, in any year, if it would
result in Growth Stock Fund's expense ratio exceeding 1% and (b) no recoupment
will be made after December 31, 1996.
Jennison Fund commenced offering Class Z shares on April 15, 1996. At that
time estimated total operating expenses for Jennison Fund's Class Z shares
were 1.12% for the fiscal period ending September 30, 1996. However,
management fees and other expenses, which are the only expenses that Jennison
Fund Class Z shares are anticipated to incur, were .93% (annualized) for the
five months ended March 31, 1996.
7
<PAGE>
Each Fund's shareholder transaction expenses are shown below. Note that the
Growth Stock Fund and Jennison Fund Class Z shares shareholder transaction
expenses are the same. There will not be any fee payable in connection with
this proposed Reorganization.
<TABLE>
<CAPTION>
GROWTH STOCK JENNISON FUND
FUND CLASS Z SHARES
------------ --------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price).................... None None
Maximum Sales Load or Deferred Sales Load Imposed
on Reinvested Dividends.......................... None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever
is lower)........................................ None None
Redemption Fees................................... None None
Exchange Fee...................................... None None
</TABLE>
Set forth below is a comparison of each Fund's operating expenses which, in
the case of Growth Stock Fund is for the fiscal year ended September 30, 1995,
and in the case of Jennison Fund is estimated for the fiscal year ending
September 30, 1996. Growth Stock Fund's other expenses were .31%, of which
PIFM subsidized .01%, thereby reducing total operating expenses to 1.00% for
the fiscal year ended September 30, 1995. The ratios are also shown on a pro
forma (estimated) combined basis, giving effect to the Reorganization.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
------------------------------------
PRO FORMA
GROWTH STOCK JENNISON FUND COMBINED
FUND CLASS Z(A) CLASS Z
------------ ------------- ---------
<S> <C> <C> <C>
Management Fees........................... .70% .60% .60%
12b-1 Fees................................ None None None
Other Expenses............................ .31 .52(b) .30
---- ---- ----
Total Fund Operating Expenses (Before
Reduction)............................... 1.01% 1.12% .90%
==== ==== ====
Total Fund Operating Expenses (After
Reduction)............................... 1.00%(c)
====
</TABLE>
- --------
(a) Jennison Fund commenced offering Class Z shares April 15, 1996.
(b) "Other Expenses" include estimated operating expenses of the Jennison Fund
for the fiscal year ending September 30, 1996, such as Directors' and
professional fees, registration fees, reports to shareholders, transfer
agency and custodian (domestic and foreign) fees (but excludes foreign
withholding taxes).
(c) In the interest of limiting the expenses of Growth Stock Fund, PIFM has
agreed, until September 30, 1996, to bear any expenses that would cause
the ratio of expenses payable by Growth Stock Fund to exceed 1%. Expenses
paid or assumed by PIFM are subject to recoupment by PIFM in later years,
provided that (a) no recoupment will be made, in any year, if it would
result in Growth Stock Fund's expense ratio exceeding 1% and (b) no
recoupment will be made after December 31, 1996.
Set forth below is an example that shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
Class Z shares............................................... $9 $29
</TABLE>
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 an investor in understanding the various types of
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly.
8
<PAGE>
PURCHASES AND REDEMPTIONS
Growth Stock Fund shares are offered exclusively to retirement programs and
arrangements (Programs) through their plan sponsors, to individual retirement
accounts (IRAs) and to certain institutional investors. Sponsors of a Program
or their agents are referred to as "Program Sponsor(s)," individual employees
participating in a Program are referred to as "Participant(s)," and individual
investors who separate from a Program are referred to as "Continuing
Participant(s)." Endowments, foundations, insurance companies and other
institutional investors are referred to as "Other Institutional Investors."
The term "shareholders" with respect to Growth Stock Fund refers to each or
all of these categories as well as to IRAs, as appropriate.
Shares of Growth Stock Fund may be purchased through a Program Sponsor's
recordkeeper or directly from PMFS. There is no minimum initial investment
requirement, and there are no sales charges associated with the purchase or
redemption of Growth Stock Fund shares. The purchase price for Growth Stock
Fund shares is the net asset value per share next determined following
acceptance of a purchase order by the Program Sponsor's recordkeeper or PMFS.
Purchases of Class Z shares of Jennison Fund are currently offered
exclusively to participants in PSI's 401(k) Plan. On or before the Closing
Date, Class Z shares will be made through PSI, Pruco Securities Corporation
(Prusec), an affiliated broker/dealer, or directly from the PMFS, at the net
asset value per share next determined after receipt of a purchase order by
PMFS, Prusec or PSI. Class Z shares are available for purchase by (i) pension,
profit sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code, deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code, and non-qualified
plans for which Jennison Fund is an available option; (Benefit Plans),
provided such plans (in combination with other plans sponsored by the same
employer or group of related employers) have at least $50 million in defined
contribution assets or make a single investment in a single Prudential Mutual
Fund of $10 million or more, (ii) investors who make a single investment in a
single Prudential Mutual Fund of $10 million or more in a single account (or
who have $10 million or more invested in shares of the Fund held in a single
account), (iii) participants in the Fund Advisory Program (a mutual fund
allocation program sponsored by PSI) for which the Fund is an available option
and (iv) investors who are or have executed a letter of intent to become,
stockholders of PIF at the time of the Reorganization or who at that time have
exchangeability into PIF. After a Benefit Plan qualifies to purchase Class Z
shares, all subsequent purchases will be for Class Z shares. Other investors
who qualify to purchase Class Z shares by virtue of having made a single
investment of $10 million or more or having accumulated at least $10 million
in shares of Jennison Fund will continue to so qualify unless the value of
their investments should fall below $10 million due to a redemption. In such
cases, investors may continue to have dividends and other distributions earned
on their remaining Class Z shares automatically reinvested in Class Z shares.
Such investors will not, however, otherwise qualify to make additional
purchases of Class Z shares unless they bring their total investment in shares
of Jennison Fund (held in a single account) back to at least $10 million
through a single transaction. There are no sales charges associated with the
purchase or redemption of Jennison Fund Class Z shares.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after the Program Sponsor's recordkeeper in the case of Growth
Stock, or PSI or PMFS in the case of Jennison Fund, receives the sell order.
No sales charges will be imposed in connection with the Reorganization.
EXCHANGE PRIVILEGES
Shareholders of Growth Stock Fund have an exchange privilege with other
available funds (depending upon the provisions of the Program) by request
through the Program's recordkeeper at the net asset value next
9
<PAGE>
determined after receipt by PMFS or the Program Sponsor's recordkeeper of an
exchange request in good order. Exchanges of Growth Stock Fund shares
currently are permitted at no charge, subject to any minimum investment
requirements, or any general limitations of the fund into which an exchange is
sought. Currently, there are no such requirements or limitations.
Shareholders of Jennison Fund have an exchange privilege with certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject to the minimum investment requirements of such funds. Class Z shares
of Jennison Fund have an exchange privilege with Class Z shares of another
fund on the basis of relative net asset value. No sales charge will be imposed
at the time of the exchange.
An exchange of shares of either Fund for shares of another Prudential Mutual
Fund is treated as a redemption of the Fund shares and purchase of the other
fund's shares for tax purposes. Each Fund's exchange privilege may be modified
or terminated at any time on sixty days' notice.
DIVIDENDS AND OTHER DISTRIBUTIONS
Jennison Fund pays dividends from net investment income, if any, semi-
annually and makes distributions of net capital gains, if any, at least
annually. Growth Stock Fund pays dividends from net investment income, and
makes distributions of net capital gains, if any, at least annually.
Shareholders of both Funds receive dividends and other distributions in
additional shares of the Fund, although Jennison Fund shareholders may elect
to receive dividends and other distributions in cash. Dividends paid by
Jennison Fund with respect to each class of its shares, to the extent any are
paid, will be calculated in the same manner, at the same time, and on the same
day.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED REORGANIZATION
The Funds have received an opinion of Kirkpatrick & Lockhart LLP to the
effect that the proposed Reorganization will constitute a tax-free
reorganization within the meaning of section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code). Accordingly, no
gain or loss will be recognized by either Fund on the transfer of all of
Growth Stock Fund's assets and the assumption of all of its liabilities, if
any, or by shareholders of Growth Stock Fund on their receipt of Class Z
shares of Jennison Fund. The tax basis for such shares received by a Growth
Stock Fund shareholder will be the same as the shareholder's tax basis for the
shares of Growth Stock Fund to be constructively surrendered in exchange
therefor. In addition, the holding period of the Jennison Fund shares to be
received by a shareholder pursuant to the Reorganization will include the
period during which the shares of Growth Stock Fund to be constructively
surrendered in exchange therefor were held, provided the latter shares were
held as capital assets by the shareholder on the date of the Reorganization.
See "The Proposed Transaction--Tax Considerations."
PRINCIPAL RISK FACTORS
As the investment policies of both Funds are similar, the risks associated
with investments in either Fund also are similar. Below is a summary of such
risks. These risks are those typically associated with a growth oriented
equity fund. For a more complete discussion of the risks attendant to an
investment in Jennison Fund, please see pages 5 through 13 of the Jennison
Fund Prospectus, which accompanies this Prospectus and Proxy Statement and is
incorporated herein by reference.
10
<PAGE>
Securities of the kinds of companies in which the Funds invest may be
subject to significant price fluctuation and above average risk. In addition,
companies achieving an earnings growth rate higher than that of companies
comprising the S&P 500 Composite Stock Price Index tend to reinvest their
earnings rather than distribute them. As a result, the Funds are not likely to
receive significant dividend income on their portfolio securities.
Accordingly, an investment in either Fund should not be considered as a
complete investment program and may not be appropriate for all investors.
The Funds may invest in securities of foreign companies and countries.
Investing in securities of foreign companies and countries involves certain
risks and considerations not typically associated with investments in domestic
companies. The Funds may also engage in various hedging and return enhancement
strategies and invest in derivative securities, which strategies and
securities may subject the Funds to greater investment risk.
SPECIAL MEETING OF JENNISON FUND SHAREHOLDERS
It is anticipated that a special meeting of Jennison Fund shareholders will
be held in October 1996. It is intended that at such meeting Jennison Fund
shareholders will consider (i) electing Jennison Fund's Board (information on
the nominated slate of Directors for Jennison Fund is attached hereto as
Appendix C), (ii) ratifying the Board's selection of Deloitte & Touche LLP as
Jennison Fund's independent public accountants, and (iii) deleting as
fundamental a policy with respect to Jennison Fund's investment in unseasoned
issuers (Jennison Fund would continue, as a matter of operating policy,
however, to not purchase any security if as a result Jennison Fund would then
have more than 5% of its total assets (determined at the time of the
investment) invested in securities of companies--including predecessors--less
than three years old, except that Jennison Fund may invest in the securities
of any U.S. Government agency or instrumentality, and in any security
guaranteed by such an agency or instrumentality).
Approval of the proposed changes by the shareholders of Jennison Fund is not
a condition to completion of the Reorganization. In addition, there can be no
assurance that any or all of these proposed modifications will be approved by
the shareholders of Jennison Fund.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan, a copy of which is attached as Appendix A to this Prospectus and Proxy
Statement.
The Plan contemplates (i) Jennison Fund acquiring all of the assets of
Growth Stock Fund in exchange solely for Class Z shares of Jennison Fund and
the assumption by Jennison Fund of all of Growth Stock Fund's liabilities, if
any, as of the Closing Date and (ii) the constructive distribution on the
Closing Date of such Class Z shares to the shareholders of Growth Stock Fund.
The assets of Growth Stock Fund to be acquired by Jennison Fund shall
include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property
of any kind owned by Growth Stock Fund and any deferred or prepaid expenses
shown as assets on the books of Growth Stock Fund on the Closing Date.
Jennison Fund will assume from Growth Stock Fund all debts, liabilities,
11
<PAGE>
obligations and duties of Growth Stock Fund of whatever kind or nature;
provided, however, that Growth Stock Fund will utilize its best efforts, to
the extent practicable, to discharge all of its known debts, liabilities,
obligations and duties prior to the Closing Date. Jennison Fund will deliver
to Growth Stock Fund Class Z shares of Jennison Fund, which Growth Stock Fund
will then distribute to its shareholders.
The value of Growth Stock Fund's assets to be acquired and liabilities to be
assumed by Jennison Fund and the net asset value of a Class Z share of
Jennison Fund will be determined as of 4:15 p.m., eastern time, on the Closing
Date and will be determined in accordance with the valuation procedures of the
respective Fund's then-current Prospectus and Statement of Additional
Information. Securities and other assets and liabilities for which market
quotations are not readily available will be valued at fair value as
determined in good faith by or under procedures established by the respective
Fund's Board.
As soon as practicable after the Closing Date, Growth Stock Fund will
distribute pro rata to its shareholders of record determined as of the close
of business on the Closing Date, the Class Z shares of Jennison Fund received
by Growth Stock Fund in exchange for such shareholders' interest in Growth
Stock Fund evidenced by their shares of Growth Stock Fund. Such distribution
will be accomplished by opening accounts on the books of Jennison Fund in the
names of Growth Stock Fund shareholders and by transferring thereto Class Z
shares of Jennison Fund previously credited to the account of Growth Stock
Fund on those books. Each shareholder account shall be credited with the
respective pro rata number of Jennison Fund's Class Z shares due to such
Growth Stock Fund shareholder. Fractional shares of Jennison Fund will be
rounded to the third decimal place.
Accordingly, every shareholder of Growth Stock Fund will own Class Z shares
of Jennison Fund immediately after the Reorganization that, except for
rounding, will be equal to the value of that shareholder's shares of Growth
Stock Fund immediately prior to the Reorganization. Moreover, because Class Z
shares of Jennison Fund will be issued at net asset value in exchange for net
assets of Growth Stock Fund that, except for rounding, will have a value equal
to the aggregate value of those shares, the net asset value per Class Z share
of Jennison Fund will be unchanged. Thus, the Reorganization will not result
in a dilution of the value of any shareholder account. However, in general,
the Reorganization will substantially reduce the percentage of ownership of
each Growth Stock Fund shareholder below such shareholder's current percentage
of ownership in Growth Stock Fund because, while the shareholder will have the
same dollar amount invested initially in Jennison Fund that it had invested in
Growth Stock Fund, its investment will represent a smaller percentage of the
combined net assets of the Funds.
Any transfer taxes payable upon issuance of shares of Jennison Fund in a
name other than that of the registered holder of the shares on the books of
Growth Stock Fund as of the time of transfer shall be paid by the person to
whom such shares are to be issued as a condition of such transfer. Any
reporting responsibility of Growth Stock Fund will continue to be its
responsibility up to and including the Closing Date and such later date on
which it is liquidated.
The consummation of the proposed Reorganization is subject to a number of
conditions set forth in the Plan, some of which may be waived by either Board.
Consummation of the Reorganization also is conditioned upon the SEC's issuance
of the Exemptive Order. The Plan may be terminated and the proposed
Reorganization abandoned at any time, prior to the Closing Date, before or
after approval by the shareholders of Growth Stock Fund. In addition, the Plan
may be amended in any mutually agreeable manner, except that no amendment may
be made subsequent to the Meeting of shareholders of Growth Stock Fund that
would detrimentally affect the value of the Jennison Fund shares to be
distributed.
12
<PAGE>
REASONS FOR THE REORGANIZATION
The Board of PIF, including a majority of its Independent Trustees, has
determined that the interests of Growth Stock Fund shareholders will not be
diluted as a result of the proposed Reorganization and that the proposed
Reorganization is in the best interests of Growth Stock Fund. In addition, the
Board of Jennison Fund, including a majority of its Independent Directors, has
determined that the interests of Jennison Fund shareholders will not be
diluted as a result of the proposed Reorganization and that the proposed
Reorganization is in the best interests of the shareholders of Jennison Fund.
The reasons for the proposed Reorganization are described above under
"Synopsis--Reasons for the Proposed Reorganization." Each Board based its
decision to approve the Plan on an inquiry into a number of factors, including
the following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Funds;
(2) the relative past and current growth in assets and investment
performance and future prospects of each Fund;
(3) the anticipated effect of the Reorganization on the expense ratios of
each Fund;
(4) the costs of the Reorganization, which will be paid for by each Fund
in proportion to its respective net asset level;
(5) the tax-free nature of the Reorganization to each Fund and its
shareholders; and
(6) the potential benefits to the shareholders of each Fund.
If the Plan is not approved by Growth Stock Fund shareholders, the PIF Board
may consider other appropriate action, such as the liquidation of Growth Stock
Fund or a merger or other business combination with an investment company
other than Jennison Fund.
DESCRIPTION OF SECURITIES TO BE ISSUED
Class Z shares of Jennison Fund will be issued to Growth Stock Fund
shareholders as of the Closing Date. Jennison Fund is authorized to issue 500
million shares of Class Z common stock, $.001 par value per share.
FEDERAL INCOME TAX CONSIDERATIONS
Growth Stock Fund has received an opinion from Kirkpatrick & Lockhart LLP,
PIF's counsel substantially to the effect that (1) the proposed Reorganization
will constitute a reorganization within the meaning of section 368(a)(1)(C) of
the Internal Revenue Code, and each Fund will be a "party to a reorganization"
within the meaning of section 368(b) of the Internal Revenue Code; (2) Growth
Stock Fund's shareholders will recognize no gain or loss on the constructive
exchange of all their Growth Stock Fund shares solely for Class Z shares of
Jennison Fund in complete liquidation of Growth Stock Fund (Internal Revenue
Code section 354(a)(1)); (3) no gain or loss will be recognized to Growth
Stock Fund on the transfer of its assets to Jennison Fund in exchange solely
for shares of Jennison Fund and the assumption by Jennison Fund of Growth
Stock Fund's liabilities, if any, and the subsequent distribution of those
shares to Growth Stock Fund's shareholders in complete liquidation thereof
(Internal Revenue Code sections 361(a) and 357(a)); (4) no gain or loss will
be recognized to Jennison Fund upon the acquisition of such assets in exchange
solely for Jennison Fund's shares and its assumption of Growth Stock Fund's
liabilities, if any (Internal Revenue Code section 1032(a)); (5) Jennison
Fund's basis for
13
<PAGE>
the assets received pursuant to the Reorganization will be the same as the
basis thereof in Growth Stock Fund's assets immediately before the
Reorganization, and Jennison Fund's holding period for those assets will
include the Growth Stock Fund's holding period therefor (Internal Revenue Code
sections 362(b) and 1223(2)); (6) a Growth Stock Fund shareholder's basis for
the shares of Jennison Fund to be received by it pursuant to the
Reorganization will be the same as its basis for the shares of Growth Stock
Fund to be constructively surrendered in exchange therefor (Internal Revenue
Code section 358(a)(1)); and (7) the holding period of the shares of Jennison
Fund to be received by shareholders of Growth Stock Fund pursuant to the
Reorganization will include the period during which the shares of Growth Stock
Fund constructively surrendered in exchange therefor were held, provided the
latter shares were held as capital assets by the shareholders on the date of
the exchange (Internal Revenue Code section 1223(1)).
Shareholders of Growth Stock Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their
individual circumstances. Because the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, those shareholders also
should consult their tax advisers as to state and local tax consequences, if
any, of the Reorganization.
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
ORGANIZATION. Jennison Fund is a Maryland corporation, and the rights of its
shareholders are governed by its Articles of Incorporation, its By-Laws and
applicable Maryland Law. PIF is a Delaware business trust, and the rights of
its shareholders are governed by its Declaration of Trust and its By-Laws and
applicable Delaware law.
CAPITALIZATION. Jennison Fund has issued shares of common stock, par value
$.001 per share. Its Articles of Incorporation authorize it to issue 2.5
billion shares to be divided into four classes, consisting of 1 billion shares
of Class A common stock and 500 million shares each of Class B, C and Z common
stock. PIF has issued shares of beneficial interest, par value $.001 per
share. The Declaration of Trust of PIF permits the Board to issue an unlimited
number of full and fractional shares in separate series, with classes within
such series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director/Trustee when requested in writing to do so by the holders of at
least 10% of the Fund's outstanding shares entitled to vote. In addition, each
Fund is required to call a meeting of shareholders for the purpose of electing
Directors/Trustees if, at any time, less than a majority of the
Directors/Trustees holding office were elected by shareholders.
Shareholders of PIF are entitled to vote on all matters submitted to a vote
of its shareholders under its Declaration of Trust, which includes the power
to vote (i) for the election or removal of Trustees as provided in the
Declaration of Trust and (ii) with respect to such additional matters relating
to PIF as may be required by applicable law, the Declaration of Trust, its By-
Laws or any registration of the PIF with the SEC (or any successor agency) or
any state, or as the Board may consider necessary or desirable. Each whole
share is entitled to one vote as to any matter on which it is entitled to vote
and each fractional share is entitled to a proportionate fractional vote.
Shareholders of Jennison Fund are entitled to one vote for each share on all
matters submitted to a vote of its shareholders under Maryland law. Approval
of certain matters, such as an amendment to the Articles of Incorporation, a
merger, consolidation or transfer of all or substantially all assets,
dissolution and removal of a Director, requires the affirmative vote of a
majority of the votes entitled to be cast. Other matters require the approval
of the affirmative vote of a majority of the votes cast at a meeting at which
a quorum is present.
14
<PAGE>
Jennison Fund's By-Laws provide that a majority of the outstanding shares
shall constitute a quorum for the transaction of business at a shareholders'
meeting. PIF's Declaration of Trust requires that forty percent of Growth
Fund's Shares entitled to vote at a shareholders meeting shall constitute a
quorum for the transaction of business at a shareholder's meeting. Matters
requiring a larger vote by law or under the organizational documents for
either Fund are not affected by such quorum requirements.
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Jennison Fund
have no personal liability for Jennison Fund's acts or obligations. Under
Delaware law, Growth Stock Fund's shareholders similarly have no personal
liability for Growth Income Fund's acts or obligations.
LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under Jennison Fund's
Articles of Incorporation and Maryland law, a Director or officer of the Fund
is not liable to the Fund or its shareholders for monetary damages for breach
of fiduciary duty as a Director or officer except to the extent such exemption
from liability or limitation thereof is not permitted by law, including the
Investment Company Act. Generally, under PIF's Declaration of Trust and
Delaware law, no Trustee or officer of PIF shall be liable to PIF or its
shareholders for any action or failure to act except for his or her own
willful misfeasance, bad faith, gross negligence or reckless disregard of his
or her duties and is not liable for errors of judgment or mistakes.
Under the Investment Company Act, a Director/Trustee may not be protected
against liability to the Fund and its security holders to which he or she
would otherwise be subject as a result of his or her willful misfeasance, bad
faith or gross negligence in the performance of his or her duties or by reason
of reckless disregard of his or her obligations and duties. The staff of the
SEC interprets the Investment Company Act to require additional limits on
indemnification of Directors/Trustees and officers.
The foregoing is only a summary of certain differences between PIF, its
Declaration of Trust, its By-Laws and Delaware law and Jennison Fund, its
Articles of Incorporation, its By-laws and Maryland law.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of each Fund as of March 31,
1996 and the pro forma combined capitalization of both Funds as if the
Reorganization had occurred on that date.
<TABLE>
<CAPTION>
JENNISON FUND PRO FORMA COMBINED
GROWTH STOCK ------------- ------------------
FUND CLASS Z* CLASS Z
------------ ------------- ------------------
<S> <C> <C> <C>
Net Assets (000).................. $288,871 -- $288,871
Net Asset Value per share......... $ 17.09 -- $ 10.39
Shares Outstanding (000).......... 16,906 -- 27,803
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Growth Stock Fund
for the fiscal year ended September 30, 1995 and estimates of ratio of
expenses to average net assets and ratio of net investment income to average
net assets of Jennison Fund Class Z shares for the fiscal year ending
September 30, 1996. The ratios also are shown on a pro forma combined basis
assuming the Reorganization on or about September 20, 1996.
<TABLE>
<CAPTION>
JENNISON FUND PRO FORMA COMBINED
GROWTH STOCK -------------- ------------------
FUND CLASS Z* CLASS Z
------------ -------------- ------------------
<S> <C> <C> <C>
Ratio of expenses to average net
assets........................ 1.00 % 1.12 % .90%
Ratio of net investment income
(loss) to average net assets... (.07)% (.03)% .19%
</TABLE>
- --------
* Jennison Fund commenced offering Class Z shares on April 15, 1996.
15
<PAGE>
INFORMATION ABOUT JENNISON FUND
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------- ----------- -----------
NOVEMBER 2, NOVEMBER 2, NOVEMBER 2,
1995(A) 1995(A) 1995(A)
THROUGH THROUGH THROUGH
MARCH 31, MARCH 31, MARCH 31,
1996 1996 1996
----------- ----------- -----------
<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) (.03)
Net realized and unrealized gain on invest-
ment transactions......................... .39 .39 .39
------- -------- -------
Total from investment operations......... .39 .36 .36
------- -------- -------
Net asset value, end of period............. $ 10.39 $ 10.36 $ 10.36
======= ======== =======
TOTAL RETURN(C)............................ 3.90% 3.60% 3.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............ $71,303 $156,909 $12,697
Average net assets (000)................... $60,165 $120,106 $10,468
Ratios to average net assets(b):
Expenses, including distribution fees.... 1.18% 1.93% 1.93%
Expenses, excluding distribution fees.... .93% .93% .93%
Net investment loss...................... (.09)% (.84)% (.84)%
Portfolio turnover rate.................. 19% 19% 19%
Average commission rate paid per share... $ .0595 $ .0595 $ .0595
</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.
GENERAL
For a discussion of the organization, classification and sub-classification
of Jennison Fund, see "General Information" and "Fund Highlights" in the
Jennison Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Jennison Fund's investment objective and policies and
risk factors associated with an investment in Jennison Fund, see "How the Fund
Invests" in the Jennison Fund Prospectus.
BOARD OF DIRECTORS
For a discussion of the responsibilities of Jennison Fund's Board, see "How
the Fund is Managed" in the Jennison Fund Prospectus.
16
<PAGE>
MANAGER AND PORTFOLIO MANAGER
For a discussion of Jennison Fund's Manager, subadviser and portfolio
manager, see "How the Fund is Managed--Manager" in the Jennison Fund
Prospectus.
JENNISON FUND SHARES
For a discussion of Jennison Fund's shares, including voting rights and
exchange rights, and how the shares may be purchased and redeemed, see
"General Information," "Shareholder Guide" and "How the Fund is Managed" in
the Jennison Fund Prospectus.
NET ASSET VALUE
For a discussion of how the net asset value of Jennison Fund Class Z shares
is determined, see "How the Fund Values its Shares" in the Jennison Fund
Prospectus.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of Jennison Fund's policy with respect to dividends and
other distributions and the tax consequences of an investment in Jennison Fund
Class Z shares, see "Taxes, Dividends and Distributions" in the Jennison Fund
Prospectus.
AFFILIATED BROKERAGE
For a discussion of Jennison Fund's policy with respect to brokerage, see
"How the Fund is Managed--Portfolio Transactions" in the Jennison Fund
Prospectus and "Portfolio Transactions and Brokerage" in the Jennison Fund
SAI.
17
<PAGE>
INFORMATION ABOUT GROWTH STOCK FUND
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
GROWTH STOCK FUND
--------------------------------------------------
NOVEMBER 5,
SIX MONTHS YEAR ENDED 1992(A)
ENDED SEPTEMBER 30, THROUGH
MARCH 31, ------------------- SEPTEMBER 30,
1996 1995 1994 1993
---------- -------- -------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 16.21 $ 12.00 $ 12.10 $ 10.00
-------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (loss) (b). (.02) -- -- .04
Net realized and unrealized gain
(loss) on investment
and foreign currency
transactions.................... .90 4.22 (.06) 2.08
-------- -------- -------- -------
Total from investment
operations..................... .88 4.22 (.06) 2.12
-------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income.......................... -- (.01) (.01) (.02)
Distributions from net realized
gains........................... -- -- (.03) --
-------- -------- -------- -------
Total distributions............. -- (.01) (.04) (.02)
-------- -------- -------- -------
Net asset value, end of period... $ 17.09 $ 16.21 $ 12.00 $ 12.10
======== ======== ======== =======
TOTAL RETURN(D).................. 5.43% 35.14% (0.50)% 21.22%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).. $288,871 $220,505 $106,956 $47,998
Average net assets (000)......... $252,924 $149,985 $ 71,449 $17,592
Ratios to average net assets: (b)
Expenses........................ 1.00%(c) 1.00% 1.00% $ 1.00%(c)
Net investment income........... (.23)%(c) (.07)% .04% .31%(c)
Portfolio turnover rate.......... 29% 64% 65% 84%
Average commission rate paid per
share........................... $ 0.0650 N/A N/A N/A
</TABLE>
- -------
(a)Commencement of investment operations.
(b)Net of expense subsidy/recovery.
(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.
AFFILIATED BROKERAGE
For a discussion of Growth Stock Fund's policy with respect to brokerage,
see "Other Considerations--Portfolio Transactions" in the PIF SAI.
GENERAL
For a discussion of the organization, classification and sub-classification
of Growth Stock Fund, see "Introduction to the Funds" and "More Facts About
the Company" in the PIF Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Growth Stock Fund's investment objective and policies,
and the risk factors associated with an investment in Growth Stock Fund, see
"The Funds" and "Other Investment Practices, Risk Considerations, and Policies
of the Fund" in the PIF Prospectus.
18
<PAGE>
BOARD OF TRUSTEES
For a discussion of the responsibilities of PIF's Board, see "Management of
the Company" and "More Facts About the Company" in the PIF Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Growth Stock Fund's Manager, subadviser and portfolio
manager, see "Management of the Company" in the PIF Prospectus.
PERFORMANCE
For a discussion of Growth Stock Fund's performance during the fiscal year
ended September 30, 1995, see Appendix B hereto.
GROWTH STOCK FUND'S SHARES
For a discussion of Growth Stock Fund's shares, including voting and
exchange rights and how the shares may be purchased and redeemed, see
"Investors Guide to Services" and "More Facts About the Company" in the PIF
Prospectus.
NET ASSET VALUE
For a discussion of how the net asset value of Growth Stock Fund's shares is
determined, see "Other Considerations" in the PIF Prospectus.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of Growth Stock Fund's policy with respect to dividends and
other distributions and the tax consequences of an investment in its shares,
see "Other Considerations" in the PIF Prospectus.
AFFILIATED BROKERAGE
For a discussion of Growth Stock Fund's policy with respect to brokerage,
see "Portfolio Transactions and Brokerage" in the Growth Stock Fund SAI.
19
<PAGE>
MISCELLANEOUS
ADDITIONAL INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the SEC. Reports and other information filed by each Fund can
be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices in New York (7 World Trade Center, Suite 1300, New
York, New York 10048) and Chicago (Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511). Copies of such material also
can be obtained at prescribed rates from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Jennison Fund
shares as part of the Reorganization will be passed upon by Shereff, Friedman,
Hoffman & Goodman, LLP, counsel to Jennison Fund.
EXPERTS
The audited financial statements of Growth Income Fund and Jennison Fund,
incorporated by reference herein or in the Statement of Additional
Information, have been audited by Deloitte & Touche LLP, independent
accountants, to the extent indicated in its reports thereon which are included
in each Fund's SAI and Growth Stock Funds' Annual Report to Shareholders for
the fiscal year ended September 30, 1995. The financial statements audited by
Deloitte & Touche LLP have been incorporated by reference herein or in the SAI
in reliance on its reports given on its authority as experts in auditing and
accounting.
VOTING INFORMATION
Forty percent of the shares of Growth Stock Fund outstanding on July 12,
1996, represented in person or by proxy, must be present for the transaction
of business at the Meeting. In the event that a quorum is not present at the
Meeting, or if a quorum is present but sufficient votes to approve the
proposal are not received, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of Proxies.
Any such adjournment will require the affirmative vote of a majority of those
shares present at the Meeting or represented by proxy. When voting on a
proposed adjournment, the persons named as proxies will vote for the proposed
adjournment all shares that they are entitled to vote, unless directed to
disapprove the proposal, in which case such shares will be voted against the
proposed adjournment. Any questions as to an adjournment of the meeting will
be voted on by the persons named in the enclosed Proxy in the same manner that
the Proxies are indicated to be voted. In the event that the Meeting is
adjourned, the same procedures will apply at a later Meeting date.
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified on a
proxy, the shares represented thereby will be voted for the proposal. A Proxy
may be revoked at any time prior to the time it is voted by written notice to
the Secretary of PIF or by attendance at the Meeting. If a Proxy that is
properly executed and returned, accompanied by instructions to withhold
authority to vote (an abstention) or represents a broker "non-vote" (that is,
a Proxy from a broker or nominee indicating that such person has not received
instructions from the beneficial owner or other person entitled to vote shares
on a particular matter with
20
<PAGE>
respect to which the broker or nominee does not have discretionary power), the
shares represented thereby, with respect to matters to be determined by a
majority of the votes cast on such matters, will be considered present at the
Meeting for purposes of determining the existence of a quorum for the
transaction of business but, not being cast, will have no effect on the
outcome of such matters. With respect to matters requiring the affirmative
vote of a majority of the total shares outstanding, an abstention or broker
non-vote will be considered present for purposes of determining the existence
of a quorum but will have the effect of a vote against such matters.
The close of business on July 12, 1996 has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Growth Stock Fund had shares outstanding and
entitled to vote. Each outstanding full share of Growth Stock Fund will be
entitled to one vote at the Meeting and each outstanding fractional share of
Growth Stock Fund will be entitled to a proportionate fractional part of one
vote. [As of July 12, 1996, the Trustees and officers of PIF, as a group,
owned less than 1% of the outstanding shares of such Fund. As of July 12,
1996, each of the following entities owned more than 25% of the outstanding
voting securities of Growth Stock Fund: . As of July 12, 1996, the
following shareholders owned beneficially or of record 5% or more of Growth
Stock Fund's outstanding shares. [Information on controlling shareholder to
come.]
The expenses of Reorganization and the solicitation of proxies will be borne
by Growth Stock Fund and Jennison Fund in proportion to their respective
assets and will include reimbursement of brokerage firms and others for
expenses in forwarding proxy solicitation material to the shareholders of
Growth Stock Fund. The solicitation of Proxies will be largely by mail but may
include telephonic, telegraphic or oral communication by regular employees of
PIFM, and its affiliates. This cost, including specified expenses, also will
be borne by Growth Stock Fund and Jennison Fund in proportion to their
respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
Growth Stock Fund arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according
to their best judgment in the interests of Growth Stock Fund, taking into
account all relevant circumstances.
SHAREHOLDERS' PROPOSALS
Any Growth Stock Fund shareholder proposal intended to be presented at any
subsequent meeting of the shareholders of Growth Stock Fund must be received
by PIF a reasonable time before the Board's solicitation relating to such
meeting is made in order to be included in Growth Stock Fund's Proxy Statement
and form of Proxy relating to that meeting. In the event that the Plan is
approved at this Meeting, it is not expected that there will be any future
shareholder meetings of Growth Stock Fund.
It is the present intent of the Board of each Fund not to hold annual
meetings of shareholders unless the election of Directors/Trustees is required
under the Investment Company Act nor to hold special meetings of shareholders
unless required by the Investment Company Act or state law.
S. Jane Rose
Secretary
Dated: July , 1996
21
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the day of , 1996, by and between The Prudential Institutional Fund
(Institutional Fund) and Prudential Jennison Fund, Inc. (Jennison Fund or
Acquiror Fund) (collectively, the Institutional Companies and each
individually, an Investment Company). Institutional Fund is a Delaware
business trust and maintains its principal place of business at 751 Broad
Street, Newark, New Jersey 07102. Jennison Fund is a Maryland corporation and
maintains its principal place of business at One Seaport Plaza, New York, New
York 10292. Shares of Institutional Fund are divided into seven portfolios,
including Growth Stock Fund (Growth Stock Fund or Acquiree Fund). Growth Stock
Fund and Jennison Fund are sometimes referred to herein collectively as the
Funds and each individually as a Fund.) Acquiror Fund's shares are divided
into four classes of shares, Class A, Class B, Class C and Class Z shares;
only Class Z shares are involved in the transactions described herein.
This Agreement is intended to be, and is adopted as, a plan of a
reorganization pursuant to section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended (Internal Revenue Code). The reorganization will comprise
the transfer of all of the assets of Growth Stock Fund in exchange solely for
Class Z shares of Jennison Fund and Jennison Fund's assumption of all of
Growth Stock Fund's liabilities, if any, and the constructive distribution,
after the Closing Date hereinafter referred to, of such shares of Jennison
Fund to the shareholders of Growth Stock Fund in liquidation of Growth Stock
Fund as provided herein, all upon the terms and conditions as hereinafter set
forth. The foregoing transactions are referred to herein as the
Reorganization.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF GROWTH STOCK FUND IN EXCHANGE FOR CLASS Z SHARES OF
JENNISON FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND LIQUIDATION OF
GROWTH STOCK FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Growth Stock Fund agrees
to sell, assign, transfer and deliver its assets, as set forth in paragraph
1.2, to Jennison Fund, and Jennison Fund agrees (a) to issue and deliver to
Growth Stock Fund in exchange therefor the number of Class Z shares in
Jennison Fund determined by dividing the net asset value of Growth Stock Fund
(computed in the manner and as of the time and date set forth in paragraph
2.1) by the net asset value of a Class Z share of Jennison Fund (computed in
the manner and as of the time and date set forth in paragraph 2.2); and (b) to
assume all of Growth Stock Fund's liabilities, if any, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for
in paragraph 3 (Closing).
1.2 The assets of Growth Stock Fund to be acquired by Jennison Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including dividends and interest receivable) and other property of any kind
owned by Growth Stock Fund and any deferred or prepaid expenses shown as
assets on the books of Growth Stock Fund on the closing date provided in
paragraph 3.1 (Closing Date).
1.3 Jennison Fund will assume from Growth Stock Fund all debts, liabilities,
obligations and duties of Growth Stock Fund of whatever kind or nature,
whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date, and whether or not specifically referred
to in this Agreement; provided,
A-1
<PAGE>
however, that Growth Stock Fund agrees to utilize its best efforts to
discharge all of its known debts, liabilities, obligations and duties prior to
the Closing Date.
1.4 On or immediately prior to the Closing Date, Growth Stock Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of its investment company taxable
income (computed without regard to any deduction for dividends paid), net tax-
exempt interest income, if any, and realized net capital gains, if any, for
all taxable years through its liquidation.
1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable Stock Fund will distribute pro rata to its
shareholders of record, determined as of the close of business on the Closing
Date, the shares of Jennison Fund received by Growth Stock Fund pursuant to
paragraph 1.1 in exchange for their interest in Growth Stock Fund. Such
distribution will be accomplished by opening accounts on the books of Jennison
Fund in the names of Growth Stock Fund shareholders and transferring thereto
the shares credited to the account of Growth Stock Fund on the books of
Jennison Fund. Each such shareholder account shall be credited with the
respective pro rata number of Jennison Fund shares due the shareholder in
whose name the account is established. Fractional shares of Jennison Fund
shall be rounded to the third decimal place. Jennison Fund shall not issue
certificates representing its shares in connection with such distribution.
1.6 Ownership of Jennison Fund shares will be shown on the books of Jennison
Fund's transfer agent. Shares of Jennison Fund will be issued in the manner
described in its then-current prospectus and statement of additional
information.
1.7 Any transfer taxes payable upon issuance of shares of Jennison Fund in a
name other than the registered holder of the shares on the books of Growth
Stock Fund as of the time of transfer thereof shall be paid by the person to
whom such shares are to be issued as a condition to the registration of such
transfer.
1.8 Any reporting responsibility with the Securities and Exchange Commission
(SEC) or any state securities commission of Growth Stock Fund is and shall
remain the responsibility of Growth Stock Fund up to and including the
Liquidation Date.
1.9 All books and records of Growth Stock Fund, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to Jennison Fund from and after the Closing Date and shall be turned
over to Jennison Fund on or prior to the Liquidation Date.
1.10 As soon as reasonably practicable after distribution of the Acquiror
Fund shares pursuant to paragraph 1.5, Acquiree Fund shall be terminated as a
series of Institutional Fund and any further actions shall be taken in
connection therewith as required by applicable law.
2.VALUATION
2.1 The value of Growth Stock Fund's assets and liabilities to be acquired
and assumed, respectively, by Jennison Fund shall be the net asset value of
Acquiree Fund computed as of 4:15 p.m., New York time, on the Closing Date
(such time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Growth Stock Fund's then-current prospectus
and statement of additional information.
A-2
<PAGE>
2.2 The net asset value of a Class Z share of Jennison Fund shall be the net
asset value per such share computed as of the Valuation Time, using the
valuation procedures set forth in Jennison Fund's then-current prospectus and
statement of additional information.
2.3 All computations of net asset value shall be made by or under the
direction of Prudential Mutual Fund Management, Inc. (PMF) in accordance with
its regular practice as manager or administrator, as the case may be, of each
Investment Company.
3. CLOSING AND CLOSING DATE
3.1 Except as provided in paragraph 3.3, the date of the closing shall be
September 20, 1996, or such later date as the parties may agree to in writing
(Closing Date). All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Jennison Fund or at
such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
Growth Stock Fund, shall deliver to Jennison Fund at the Closing a certificate
of an authorized officer of State Street stating that (a) Growth Stock Fund's
portfolio securities, cash and any other assets have been transferred in
proper form to Jennison Fund on the Closing Date and (b) all necessary taxes,
if any, have been paid, or provision for payment has been made, in conjunction
with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New
York Stock Exchange (NYSE) or other primary exchange is closed to trading
(other than prior to, or following the close of, trading on such exchange on a
regular business day) or trading thereon is restricted or (b) trading or the
reporting of trading on the NYSE or other primary exchange or elsewhere is
disrupted so that accurate appraisal of the value of the net assets of Growth
Stock Fund and of the net asset value per Class Z share of Jennison Fund is
impracticable, the Closing Date shall be postponed until the first business
day after the date when such trading shall have been fully resumed and such
reporting shall have been restored.
3.4 Institutional Fund shall deliver to Jennison Fund on or prior to the
Liquidation Date the names and addresses of Acquiree Fund's shareholders and
the number of outstanding shares owned by each such shareholder, all as of the
close of business on the Closing Date, certified by the Secretary or Assistant
Secretary of Institutional Fund. Jennison Fund shall issue and deliver to
Institutional Fund at the Closing a confirmation or other evidence
satisfactory to Institutional Fund that shares of Jennison Fund have been or
will be credited to Growth Stock Fund's account on the books of Jennison Fund.
At the Closing each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, receipts and other documents as such
other party or its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
3.5 Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Closing Date, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Closing Date except as they may be affected by the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Institutional Fund represents and warrants as follows:
4.1.1 Institutional Fund is a business trust duly organized and validly
existing under the laws of the State of Delaware, and Growth Stock Fund has
been established in accordance with the terms of Institutional Fund's
Declaration of Trust (Declaration of Trust);
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<PAGE>
4.1.2 Institutional Fund is an open-end management investment company
duly registered under the Investment Company Act, and such registration is
in full force and effect;
4.1.3 Institutional Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of its Declaration of Trust or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which Growth Stock Fund is a party or by which Growth Stock Fund is bound;
4.1.4 All material contracts or other commitments of Growth Stock Fund,
or any of its properties or assets, except this Agreement and investment
contracts (including options, futures and forward contracts) will be
terminated, or provision for discharge of any liabilities of Acquiree Fund
thereunder will be made on or prior to the Closing Date without either
Fund's incurring any liability or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Acquiree Fund or any of its
properties or assets, except as previously disclosed to Acquiror Fund.
Institutional Fund knows of no facts that might form the basis for the
institution of such litigation, proceedings or investigation, and Acquiree
Fund is not a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body that materially and adversely
affects its business or its ability to consummate the transactions herein
contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of Growth Stock Fund at September 30, 1995 and for the year then
ended (copies of which have been furnished to Jennison Fund) have been
audited by Deloitte & Touche LLP, independent accountants, in accordance
with generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and
present fairly, in all material respects, the financial condition, results
of operations, changes in net assets and financial highlights of Growth
Stock Fund as of and for the period ended on such date, and there are no
material known liabilities of Growth Stock Fund (contingent or otherwise)
not disclosed therein;
4.1.7 Since September 30, 1995, there has not been any material adverse
change in Growth Stock Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by Growth Stock Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by Jennison Fund. For the purposes of this
paragraph 4.1.7, a decline in net asset value or net asset value per share
or a decrease in the number of shares outstanding shall not constitute a
material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other
tax returns and reports of Growth Stock Fund required by law to have been
filed on or before such dates shall have been timely filed, and all federal
and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Institutional Fund's knowledge, all federal or
other taxes required to be shown on any such return or report have been
shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
4.1.9 Acquiree Fund is a "fund" as defined in section 851(h)(2) of the
Internal Revenue Code; for each past taxable year since it commenced
operations, Growth Stock Fund (a) has met the requirements of Subchapter M
of the Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current taxable
year, and (b) has made such distributions as are necessary to avoid the
imposition of federal excise tax or has paid or provided for the payment of
A-4
<PAGE>
any excise tax imposed; and Acquiree Fund has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M of
the Internal Revenue Code did not apply to it. Acquiree Fund's assets shall
be invested at all times through the Closing Date in a manner that ensures
compliance with the foregoing;
4.1.10 All issued and outstanding shares of Growth Stock Fund are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Growth Stock Fund will, at the time of the Closing, be held in
the names of the persons and in the amounts set forth in the list of
shareholders submitted to Jennison Fund in accordance with the provisions
of paragraph 3.4. Growth Stock Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any of its shares;
4.1.11 At the Closing Date, Growth Stock Fund will have good and
marketable title to its assets to be transferred to Jennison Fund pursuant
to paragraph 1.1 and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder free of any liens, claims,
charges or other encumbrances, and, upon delivery and payment for such
assets, Jennison Fund will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of Institutional Fund and by
all necessary corporate action, other than shareholder approval, on the
part of Growth Stock Fund, and this Agreement constitutes a valid and
binding obligation of Institutional Fund, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws relating
to or affecting creditors' rights and by general principles of equity. At
the Closing Date, the performance of this Agreement shall have been duly
authorized by all necessary action by Acquiree Fund's shareholders;
4.1.13 The information furnished and to be furnished by Institutional
Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.1.14 On the effective date of the registration statement filed with the
SEC by Jennison Fund on Form N-14 relating to the shares of Jennison Fund
issuable hereunder, and any supplement or amendment thereto (Registration
Statement), at the time of the meeting of the shareholders of Growth Stock
Fund and on the Closing Date, the Proxy Statement of Institutional Fund and
the Prospectus of Jennison Fund and to be included in the Registration
Statement (collectively, Proxy Statement)
(a) will comply in all material respects with the provisions of the
Securities Act of 1933 (1933 Act), the Securities Exchange Act of 1934
(1934 Act) and the Investment Company Act and the rules and regulations
thereunder and
(b) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not apply to
statements in or omissions from the Proxy Statement made in reliance upon
and in conformity with information furnished by Jennison Fund for use
therein.
4.2 Jennison Fund represents and warrants as follows:
4.2.1 Jennison Fund is a corporation duly organized and validly existing
under the laws of the State of Maryland;
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<PAGE>
4.2.2 Jennison Fund is an open-end management investment company duly
registered under the Investment Company Act, and such registration is in
full force and effect;
4.2.3 Jennison Fund is not, and the execution, delivery and performance
of this Agreement will not result, in violation of any provision of its
Articles of Incorporation or By-Laws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which
Jennison Fund is a party or by which Jennison Fund is bound;
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Jennison Fund or any of its
properties or assets, except as previously disclosed in writing to
Institutional Fund. Jennison Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings or
investigations, and Jennison Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities
of Jennison Fund at September 13, 1995 (copies of which have been furnished
to Institutional Fund) have been audited by Deloitte & Touche LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations, changes
in net assets and financial highlights of Jennison Fund as of and for the
periods ended on such date, and there are no material known liabilities of
Jennison Fund (contingent or otherwise) not disclosed therein;
4.2.6 Since September 13, 1995, there has not been any material adverse
change in Jennison Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by Jennison Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by Insitutional Fund. For the purposes of this
paragraph 4.2.6, a decline in net asset value or net asset value per share
or a decrease in the number of shares outstanding shall not constitute a
material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other
tax returns and reports of Jennison Fund required by law to have been filed
on or before such dates shall have been timely filed, and all federal and
other taxes shown as due on said returns and reports shall have been paid
insofar as due, or provision shall have been made for the payment thereof,
and, to the best of Jennison Fund's knowledge, all federal or other taxes
required to be shown on any such return or report are shown on such return
or report, no such return is currently under audit and no assessment has
been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations, Jennison
Fund (a) has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment company and
will meet those requirements for the current taxable year and (b) has made
such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed; and Acquiror Fund has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M of the Internal
Revenue Code did not apply to it. Acquiror Fund's assets shall be invested
at all times through the Closing Date in a manner that ensures compliance
with the forgoing;
4.2.9 All issued and outstanding shares of Jennison Fund are, and at the
Closing Date will be, duly and validly authorized, issued and outstanding,
fully paid and non-assessable. Except as contemplated by
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this Agreement, Jennison Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any of its shares
except for the Class B shares that have the conversion feature described in
Acquiror Fund's current prospectus;
4.2.10 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of Jennison Fund and by all
necessary corporate action on the part of Jennison Fund, and this Agreement
constitutes a valid and binding obligation of Jennison Fund, enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws relating to or affecting creditors' rights and by general principles
of equity;
4.2.11 The shares of Jennison Fund to be issued and delivered to Growth
Stock Fund pursuant to this Agreement will, at the Closing Date, have been
duly authorized and, when issued and delivered as provided in this
Agreement, will be duly and validly issued and outstanding shares of
Jennison Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Jennison Fund for
use in applications for orders, registration statements, proxy materials
and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.2.13 On the effective date of the Registration Statement, at the time
of the meeting of the shareholders of Growth Stock Fund and on the Closing
Date, the Proxy Statement (a) will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the Investment Company Act and
the rules and regulations thereunder and (b) will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein in light of the circumstances under which they were made
or necessary to make the statements therein not misleading; provided,
however, that the representations and warranties in this paragraph 4.2.13
shall not apply to statements in or omissions from the Proxy Statement made
in reliance upon and in conformity with information furnished by
Institutional Fund for use therein.
5. COVENANTS
5.1 Each Investment Company covenants to operate its respective Fund's
business in the ordinary course between the date hereof and the Closing Date,
it being understood that the ordinary course of business will include
declaring and paying customary dividends and other distributions and such
changes in operations as are contemplated by the normal operations of the
Funds, except as may otherwise be required by paragraph 1.4 hereof; provided
that Acquiree Fund shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiror Fund's prior
consent.
5.2 Institutional Fund covenants to call a meeting of Acquiree Fund's
shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated hereby
(including the determinations of its Trustees as set forth in Rule 17a-8(a)
under the Investment Company Act).
5.3 Institutional Fund covenants that Jennison Fund shares to be received by
Growth Stock Fund in accordance herewith are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
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5.4 Institutional Fund covenants that it will assist Jennison Fund in
obtaining such information as Jennison Fund reasonably requests concerning the
beneficial ownership of Growth Stock Fund's shares.
5.5 Subject to the provisions of this Agreement, each Investment Company
will take, or cause to be taken, all action, and will do, or cause to be done,
all things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6 Institutional Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such act.
5.7 Institutional Fund covenants that it will, from time to time, as and
when requested by Jennison Fund, execute and deliver or cause to be executed
and delivered all such assignments and other instruments, and will take or
cause to be taken such further action, as Jennison Fund may deem necessary or
desirable in order to vest in and confirm to Jennison Fund title to and
possession of all the assets of Growth Stock Fund to be sold, assigned,
transferred and delivered hereunder and otherwise to carry out the intent and
purpose of this Agreement.
5.8 Jennison Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the Investment Company
Act (including the determinations of its Directors as set forth in Rule 17a-
8(a) thereunder) and such of the state Blue Sky or securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5.9 Jennison Fund covenants that it will, from time to time, as and when
requested by Institutional Fund, execute and deliver or cause to be executed
and delivered all such assignments and other instruments, and will take and
cause to be taken such further action, as Institutional Fund may deem
necessary or desirable in order to (a) vest in and confirm to Institutional
Fund (on behalf of Acquiree Fund) title to and possession of all the shares of
Jennison Fund to be transferred to Growth Stock Fund pursuant to this
Agreement and (b) assume all of Growth Stock Fund's liabilities in accordance
with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INSTITUTIONAL FUND
The obligations of Institutional Fund to consummate the transactions
provided for herein shall be subject to the performance by Jennison Fund of
all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
6.1 All representations and warranties of Jennison Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as
if made on and as of the Closing Date.
6.2 Jennison Fund shall have delivered to Institutional Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Jennison Fund, in form and substance satisfactory to
Institutional Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Jennison Fund in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other
matters as Institutional Fund shall reasonably request.
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6.3 Institutional Fund shall have received on the Closing Date a
favorable opinion from Shereff, Friedman, Hoffman & Goodman, LLP, counsel
to Jennison Fund, dated as of the Closing Date, to the effect that:
6.3.1 Jennison Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland, with power under its
Articles of Incorporation to own all of its properties and assets and,
to the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered
by Jennison Fund and, assuming due authorization, execution and
delivery of this Agreement by Institutional Fund, is a valid and
binding obligation of Jennison Fund enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding
at law or in equity), and further subject to the qualifications set
forth in the next succeeding sentence. Such counsel may state that they
express no opinion as to the validity or enforceability of any
provision regarding choice of New York Law to govern this Agreement;
6.3.3 The shares of Jennison Fund to be distributed to Growth Stock
Fund shareholders under this Agreement, assuming their due
authorization and delivery as contemplated by this Agreement, will be
validly issued and outstanding and fully paid and non-assessable, and
no shareholder of Jennison Fund has any pre-emptive right to subscribe
therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
performance by Acquiror Fund of its obligations hereunder will not, (a)
conflict with Jennison Fund's Articles of Incorporation or By-Laws or
(b) result in a default or a breach of (i) the Management Agreement
dated October 27, 1995 between Jennison Fund and PMF. (ii) the
Custodian Contract dated October 27, 1995 between Jennison Fund and
State Street. (iii) the Distribution Agreement dated October 27, 1995
between Jennison Fund and Prudential Securities Incorporated and (iv)
the Transfer Agency and Service Agreement dated October, 27 1995
between Jennison Fund and Prudential Mutual Fund Services, Inc.;
provided, however, that such counsel may state that they express no
opinion with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that
insofar as performance by Jennison Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no
opinion as to bankruptcy, insolvency, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
6.3.5 To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, filing
or order of any court or governmental authority is required for the
consummation by Jennison Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act and
the Investment Company Act and such as may be required under state Blue
Sky or securities laws;
6.3.6 Jennison Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administration
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Acquiror Fund or any of its
properties or assets, and (b) Acquiror Fund is not a party to or
subject to the provision of any order, decree or
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judgment of any court or governmental body that materially and
adversely affects its business, except as otherwise disclosed.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Jennison Fund and certificates of
public officials. As to matters of Maryland law, such counsel may rely upon
opinions of Maryland counsel reasonably satisfactory to Institutional Fund, in
which case the opinion shall state that both such counsel and Institutional
Fund are justified in so relying. In rendering such opinion, such counsel also
may (a) make assumptions regarding the authenticity, genuineness and/or
conformity of documents and copies thereof without independent verification
thereof, (b) limit such opinion to applicable federal and state law and (c)
define the word "knowledge" and related terms to mean the knowledge of
attorneys then with such firm who have devoted substantive attention to
matters directly related to this Agreement and the Reorganization.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF JENNISON FUND
The obligations of Jennison Fund to complete the transactions provided for
herein shall be subject to the performance by Institutional Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
7.1 All representations and warranties of Institutional Fund contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.
7.2 Institutional Fund shall have delivered to Jennison Fund on the
Closing Date a statement of Acquiree Fund's assets and liabilities, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied, together with a list of
Acquiree Fund's portfolio securities showing the adjusted tax bases of such
securities by lot, as of the Closing Date, certified by the Treasurer of
Institutional Fund.
7.3 Institutional Fund shall have delivered to Jennison Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Institutional Fund, in form and substance satisfactory to
Jennison Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Institutional Fund made in this Agreement
are true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Jennison Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Growth Stock Fund shall
have declared and paid to shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially
all (and in any event not less than ninety-eight percent) of its investment
company taxable income (computed without regard to any deduction for
dividends paid), net tax-exempt interest income, if any, and realized net
capital gain, if any, for all taxable years through its liquidation.
7.5 Jennison Fund shall have received on the Closing Date a favorable
opinion from Kirkpatrick & Lockhart LLP, counsel to Institutional Fund,
dated as of the Closing Date, to the effect that:
7.5.1 Institutional Fund is a business trust duly organized and
validly existing under the laws of the State of Delaware, with power
under its Declaration of Trust to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its business as
presently conducted, and Growth Stock Fund has been duly established in
accordance with the terms of Institutional Fund Declaration of Trust;
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7.5.2 This Agreement has been duly authorized, executed and delivered
by Institutional Fund and, assuming due authorization, execution and
delivery of this Agreement by Acquiror Fund, is a valid and binding
obligation of Institutional Fund enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding
at law or in equity), and further subject to the qualifications set
forth in the next succeeding sentence. Such counsel may state that they
express no opinion as to the validity or enforceability of any
provision regarding choice of New York law to govern this Agreement;
7.5.3 The execution and delivery of this Agreement did not, and the
performance by Institutional Fund of its obligations hereunder will
not, (a) violate Institutional Fund's Declaration of Trust or By-Laws
or (b) result in a default or a breach of (i) the Management Agreement
dated , 199 between Institutional Fund and Prudential
Institutional Fund Management, Inc., (ii) the Custodian Agreement dated
, 199 between Institutional Fund and State Street, (iii) the
Distribution Agreement with respect to Acquiree Fund dated , 199
between Institutional Fund and Prudential Retirement Services, Inc.,
(iv) the Administration Agreement dated , 199 between
Institutional Fund and PMF and (v) the Transfer Agency and Service
Agreement, dated , 199 between Institutional Fund and Prudential
Mutual Fund Services, Inc.; provided, however, that such counsel may
state that they express no opinion with respect to federal or state
securities laws, other antifraud laws and fraudulent transfer laws;
provided further that insofar as performance by Institutional Fund of
its obligations under this Agreement is concerned, such counsel may
state that they express no opinion as to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required
to be obtained by Institutional Fund under the federal laws of the
United States, the laws of the State of New York and Chapter 38 of the
Delaware Code for the consummation of the transactions contemplated by
this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Acquiree Fund that would be
required to be disclosed in the Registration Statement and is not so
disclosed;
7.5.6 Institutional Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration; and
7.5.7 To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administration
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Institutional Fund (with
respect to Acquiree Fund) or any of its properties or assets
distributable or allocable to Acquiree Fund, and (b) Institutional Fund
is not a party to or subject to the provision of any order, decree or
judgment of any court or governmental body that materially and
adversely affects its business, except as otherwise disclosed.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Institutional Fund and certificates
of
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public officials. As to matters of Delaware law, such counsel may rely upon
opinions of Delaware counsel reasonably satisfactory to Acquiror Fund, in
which case the opinion shall state that both such counsel and Acquiror Fund
are justified in so relying. In rendering such opinion, such counsel also may
(a) make assumptions regarding the authenticity, genuineness and/or conformity
of documents and copies thereof without independent verification thereof, (b)
limit such opinion to applicable federal and state law and (c) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
such firm who have devoted substantive attention to matters directly related
to this Agreement and the Reorganization.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE INVESTMENT COMPANIES
The obligations of each Investment Company hereunder are subject to the
further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Trustees of Institutional
Fund and the Directors of Jennison Fund as to the determinations set forth
in Rule 17a-8(a) under the Investment Company Act, (b) the Directors of
Jennison Fund as to the assumption by Jennison Fund of the liabilities of
Growth Stock Fund and (c) the holders of the outstanding shares of Growth
Stock Fund in accordance with the provisions of Institutional Fund's
Declaration of Trust, and certified copies of the resolutions evidencing
such approvals shall have been delivered to Jennison Fund.
8.2 Any proposed change to Jennison Fund's operations that may be
approved by the Directors of Jennison Fund subsequent to the date of this
Agreement but in connection with and as a condition to implementing the
transactions contemplated by this Agreement, for which the approval of
Jennison Fund's shareholders is required pursuant to the Investment Company
Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of Jennison Fund in accordance with the
Investment Company Act and the provisions of the Articles of Incorporation
of Jennison Fund, and certified copies of the resolution evidencing such
approval shall have been delivered to Institutional Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC
and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by either Investment
Company to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a
risk of a material adverse effect on the assets or properties of either
Fund, provided that either party hereto may for itself waive any part of
this condition.
8.5 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness thereof shall have
been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated. In addition, the
SEC shall not have issued an unfavorable report with respect to the
Reorganization under section 25(b) of the Investment Company Act nor
instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the Investment
Company Act.
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8.6 The Investment Companies shall have received on or before the Closing
Date an opinion of Kirkpatrick & Lockhart LLP, satisfactory to each
Investment Company, substantially to the effect that for federal income tax
purposes:
8.6.1 The acquisition by Jennison Fund of the assets of Growth Stock
Fund in exchange solely for voting shares of Jennison Fund and the
assumption by Acquiror Fund of Growth Stock Fund's liabilities, if any,
followed by the distribution of those Jennison Fund shares by Growth
Stock Fund pro rata to its shareholders, pursuant to its liquidation
and constructively in exchange for their Growth Stock Fund shares, will
constitute a reorganization within the meaning of section 368(a)(1)(C)
of the Internal Revenue Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Internal
Revenue Code;
8.6.2 Growth Stock Fund's shareholders will recognize no gain or loss
upon the constructive exchange of all of their shares of Growth Stock
Fund solely for shares of Jennison Fund in complete liquidation of
Growth Stock Fund;
8.6.3 No gain or loss will be recognized to Growth Stock Fund upon
the transfer of its assets to Jennison Fund in exchange solely for
shares of Jennison Fund and the assumption by Jennison Fund of Growth
Stock Fund's liabilities, if any, and the subsequent distribution of
those shares to Growth Stock Fund shareholders in complete liquidation
of Growth Stock Fund;
8.6.4 No gain or loss will be recognized to Jennison Fund upon the
acquisition of Growth Stock Fund's assets in exchange solely for shares
of Jennison Fund and the assumption of Growth Stock Fund's liabilities,
if any;
8.6.5 Jennison Fund's basis for those assets will be the same as the
basis thereof in Growth Stock Fund's hands immediately before the
transfer, and Acquiror Fund's holding period for those assets will
include Acquiree Fund's holding period therefor;
8.6.6 A Growth Stock Fund shareholder's basis for the shares of
Jennison Fund to be received by it pursuant to the Reorganization will
be the same as its basis for the shares of Growth Stock Fund to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of Jennison Fund shares to be received by a
Growth Stock Fund shareholder pursuant to the Reorganization will
include the period during which the Growth Stock Fund shares to be
constructively surrendered in exchange therefor were held; provided
such Growth Stock Fund shares were held as capital assets by that
shareholder on the date of the exchange.
In rendering such opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (or in separate letters
addressed to such counsel) and the certificates delivered pursuant to
paragraph 3.5. Notwithstanding subparagraphs 8.6.3 and 8.6.5, such
opinion may state that no opinion is expressed as to the effect of the
Reorganization on the Funds or any shareholder with respect to any
asset as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year
(or on the termination or transfer thereof) under a mark-to-market
system of accounting.
9. FINDER'S FEES AND EXPENSES
9.1 Each Investment Company represents and warrants to the other that there
are no finder's fees payable in connection with the transactions provided for
herein.
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9.2 The expenses incurred in connection with the entering into and carrying
out of the provisions of this Agreement shall be allocated to the Funds pro
rata in a fair and equitable manner in proportion to their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Investment
Companies.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
Either Investment Company may at its option terminate this Agreement at or
prior to the Closing Date because of:
11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or
11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will
not or cannot be met; or
11.3 A mutual written agreement of the Investment Companies.
In the event of any such termination, there shall be no liability for
damages on the part of either Investment Company (other than the liability of
the Funds to pay their allocated expenses pursuant to paragraph 9.2) or any
Director, Trustee or officer of either Investment Company.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the Acquiree Fund's
shareholders' meeting called by Institutional Fund pursuant to paragraph 5.2,
no such amendment may have the effect of changing the provisions for
determining the number of shares of Jennison Fund to be distributed to Growth
Stock Fund shareholders under this Agreement to the detriment of such
shareholders without their further approval.
13. NOTICES
Any notice, report, demand or other communication to either party required
or permitted by any provision of this Agreement shall be in writing and shall
be given by hand delivery, or prepaid certified mail or overnight service
addressed to such party c/o Prudential Mutual Fund Management, Inc., One
Seaport Plaza, New York, New York 10292, Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
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14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York; provided that, in the case of any conflict
between such laws and the federal securities laws, the latter shall govern.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof
or of any rights or obligations hereunder shall be made by either party
without the written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give any person,
firm or corporation other than the parties and their respective successors and
assigns any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.
The Prudential Institutional Fund on
behalf of its Growth Stock Fund
By: _________________________________
Mark R. Fetting, President
Prudential Jennison Fund, Inc.
By: _________________________________
Richard A. Redeker, President
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APPENDIX B
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to achieve long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
INVESTMENT APPROACH: The Adviser concentrates
on large capitalization companies with the potential for above-average growth.
Stocks are selected on a company-by-company basis through the use of fundamental
analysis.
The Adviser looks for companies that demonstrate superior sales growth, high
levels of unit growth, high return on assets and equity, and a strong balance
sheet, as well as being attractively valued in the judgment of the Adviser.
ADVISER: The Growth Stock Fund is managed by Jennison Associates Capital Corp.
Founded in 1969 and acquired by The Prudential in 1985, Jennison adheres to
clearly defined investment philosophies and is dedicated to achieving superior
investment results for institutional investors. Jennison manages over $28
billion in equity, balanced, and fixed income accounts at September 30, 1995.
ADVISER'S COMMENTS: For the year ended September 30, 1995, the Fund increased
35.1% versus the market overall, as measured by the S&P 500, which improved
29.7% in the same period. The Lipper Growth Fund Average increased 25.9% over
the same period. This positive performance can be attributed mostly to
particularly strong performance in three areas: financial services, capital
spending, and technology. The lower interest rate environment which began in
November 1994 helped boost interest rate sensitive stocks in the portfolio.
Strong capital spending both domestically and abroad helped bolster the current
and future earnings prospects of many capital goods producers. In technology,
there are a number of evolving long-term trends which have, and should continue
to have, both positive earnings and valuation consequences for companies in the
portfolio.
Throughout the past year we have had substantial net, positive earnings estimate
surprises. This has been a key to the out performance of the Fund and is the key
to our objective over time. Our goal is to own the best growth stocks we can
find at a reasonable valuation.
By and large we remain optimistic about growth stocks in a slow economic growth
environment like we are currently experiencing, which is characterized by low
inflation and low interest rates. As always, growth stocks will be more volatile
than the market overall, but we believe there are ample opportunities for
companies with growing revenue and earnings to provide significant positive
returns.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS:
Average Annual Returns Fund S&P 500
-------------------------- ------------- --------
<S> <C> <C>
One Year ended 9/30/95 +35.14% +29.74%
From Inception (11/5/92) +18.34% +15.40%
</TABLE>
Returns from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. The Manager is currently limiting the
expenses of the Fund. Without this reduction of expenses, the total return would
have been lower.
B-1
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment
(CHART)
-------------- Growth Stock Fund - - - - S&P 500 Index
Past performance is no guarantee of future results and an investor's
shares may be worth more or less than their original cost.
This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in The Prudential Institutional Fund:
Growth Stock Fund (the ``Fund'') with a similar investment in the
Standard & Poor's 500 Index (S&P 500) by portraying the initial account
value at the commencement of operations and subsequent account values at
the end of each fiscal year (September 30) beginning in 1992. For
purposes of the graph and, unless otherwise indicated in the
accompanying table, it has been assumed that all recurring fees
(including management fees) were deducted and all dividends and
distributions were reinvested.
The S&P 500 is a capital-weighted index, representing the aggregate
market value of the common equity of 500 stocks primarily traded on the
New York Stock Exchange. The S&P 500 is an unmanaged index and includes
the reinvestment of all dividends, but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Fund. The securities which comprise the S&P 500 may differ substantially
from the securities in the Fund's portfolio. S&P 500 is not the only
index that may be used to characterize performance of growth funds and
other indices may portray different comparative performance.
B-2
<PAGE>
APPENDIX C
PRUDENTIAL JENNISON FUND, INC.
NOMINATED SLATE OF DIRECTORS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- -------------------------------------------
<C> <S>
Edward D. Beach (71) President and Director of BMC Fund, Inc., a closed-
c/o Prudential Mutual Fund end investment company; prior thereto Vice Chairman
Management, Inc. of Broyhill Furniture Industries, Inc.; Certified
One Seaport Plaza Public Accountant; Secretary and Treasurer of
New York, NY Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College; President,
Treasurer and Director of First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.; President
and Director of Global Utility Fund, Inc.
Delayne Dedrick Gold (57) Marketing and Management Consultant
Donald D. Lennox (77) Chairman (since February 1990) and Director (since
c/o Prudential Mutual Fund April 1989) of International Imaging Materials,
Management, Inc. Inc.; Retired Chairman, Chief Executive Officer and
One Seaport Plaza Director of Schlegel Corporation (industrial
New York, NY manufacturing) (March 1987-February 1989); Director
of Gleason Corporation, Personal Sound
Technologies, Inc., and The High Yield Income Fund,
Inc.
Douglas H. McCorkindale (57) Vice Chairman, Gannett Co. Inc. (publishing and
c/o Prudential Mutual Fund media) (since March 1984); Director, Continental
Management, Inc. Airlines, Inc., Gannett Co. Inc. and Frontier
One Seaport Plaza Corporation
New York, NY
Thomas T. Mooney (54) President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Fund Commerce; formerly Rochester City Manager; Trustee
Management, Inc. of Center for Governmental Research, Inc.; Director
One Seaport Plaza of Blue Cross of Rochester, The Business Councel of
New York, NY New York State, Monroe County Water Authority,
Rochester Jobs, Inc., Executive Service Corps of
Rochester, Monroe County Industrial Development
Corporation, Northeast-Midwest Institute, First
Financial Fund, Inc., and The High Yield Plus Fund,
Inc.
Stephen P. Munn (53) Chairman (since January 1994), Director and
President (since 1988) and Chief Executive Officer
(1988-December 1993) of Carlisle Companies
Incorporated.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- -------------------------------------------
<C> <S>
*Richard A. Redeker (52) President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of Operating
Committee (since October 1993), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG); Executive
Vice President (since January 1994), The Prudential
Investment Corporation; Director (since January
1994), Prudential Mutual Fund Distributors, Inc.
(PMFD) and Prudential Mutual Fund Services, Inc.
(PMFS); formerly 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.
Sir Michael Sandberg (69) Chairman, Broadstreet, Inc.; Director of
International Totalizer Systems, Global Utility
Fund Inc. and The Global Total Return Fund, Inc.;
Chairman and Director of PRICOA Worldwide Investors
Portfolio; Former Chairman of Hong Kong and
Shanghai Banking Corporation and British Bank of
the Middle East (1977-1986)
Robin B. Smith (56) President (since September 1981) and Chief Executive
c/o Prudential Mutual Fund Officer (since January 1988) of Publishers Clearing
Management, Inc. House; Director of BellSouth Corporation, The
One Seaport Plaza Omnicom Group, Inc., Spring Industries, Inc.,
New York, NY Texaco Inc., First Financial Fund, Inc., The High
Yield Income Fund, Inc. and The High Yield Plus
Fund, Inc.
Louis A. Weil, III (55) Publisher and Chief Executive Officer, Phoenix
c/o Prudential Mutual Fund Management, Newspapers, Inc. (since August 1991); Director of
Inc. One Seaport Plaza New York, NY Central Newspapers, Inc. (since September 1991);
prior thereto, Publisher of Time Magazine (May
1989-March 1991); formerly President, Publisher and
CEO of The Detroit News (February 1986-August
1989); formerly, member of the Advisory Board,
Chase Manhattan Bank-Westchester
Merle T. Welshans (78) Adjunct Professor of Finance, Washington University
(since July 1983); prior thereto, Vice President-
Finance of Union Electric Company; Director of
Prudential Structured Maturity Fund, Inc. and
Prudential Utility Fund, Inc.; Trustee of the
Hotchkis and Wiley Funds
Clay T. Whitehead (57) President, National Exchange Inc. (since May 1983)
</TABLE>
C-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SYNOPSIS.................................................................. 2
General................................................................. 2
The Proposed Reorganization and Liquidation............................. 2
Reasons for the Proposed Reorganization and Liquidation................. 3
Structure of Growth Stock Fund and Jennison Fund........................ 4
Investment Objective and Policies....................................... 5
Certain Differences Between Growth Stock Fund and Jennison Fund......... 6
Fees and Expenses....................................................... 6
Management Fees....................................................... 6
Distribution Fees..................................................... 7
Administration Fees................................................... 7
Other Expenses........................................................ 7
Fee Waivers and Subsidy............................................... 7
Expense Ratios........................................................ 7
Purchases and Redemptions............................................... 9
Exchange Privileges..................................................... 9
Dividends and Other Distributions....................................... 10
Federal Income Tax Consequences of the Proposed Reorganization.......... 10
PRINCIPAL RISK FACTORS.................................................... 10
SPECIAL MEETING OF THE JENNISON FUND SHAREHOLDERS......................... 11
THE PROPOSED TRANSACTION.................................................. 11
Agreement and Plan of Reorganization and Liquidation.................... 11
Reasons for the Reorganization.......................................... 13
Description of Securities to be Issued.................................. 13
Federal Income Tax Considerations....................................... 13
Certain Comparative Information About the Funds......................... 14
Organization.......................................................... 14
Capitalization........................................................ 14
Shareholder Meetings and Voting Rights................................ 14
Shareholder Liability................................................. 15
Liability and Indemnification of Directors/Trustees................... 15
Pro Forma Capitalization and Ratios..................................... 15
INFORMATION ABOUT JENNISON FUND........................................... 16
INFORMATION ABOUT GROWTH STOCK FUND....................................... 18
MISCELLANEOUS............................................................. 20
Additional Information.................................................. 20
Legal Matters........................................................... 20
Experts................................................................. 20
VOTING INFORMATION........................................................ 20
OTHER MATTERS............................................................. 21
SHAREHOLDERS' PROPOSALS................................................... 21
APPENDIX A--Agreement and Plan of Reorganization and Liquidation.......... A-1
APPENDIX B--Performance Information--Growth Stock Fund.................... B-1
APPENDIX C--Jennison Fund Nominated Slate of Directors.................... C-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus relating to Class Z shares of Prudential Jennison Fund, Inc.
dated April 15, 1996.
</TABLE>
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 25, 1996
ACQUISITION OF ASSETS OF
THE PRUDENTIAL INSTITUTIONAL FUND--GROWTH STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 824-7513
----------------
BY AND IN EXCHANGE FOR CLASS Z SHARES OF
PRUDENTIAL JENNISON FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
This Statement of Additional Information relates specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of the Growth Stock Fund, a series of The Prudential Institutional
Fund (PIF) by Prudential Jennison Fund, Inc. (Jennison Fund). This Statement
of Additional Information consists of this cover page, the attached pro forma
financial statements and the following described documents, each of which is
attached hereto and incorporated herein by reference:
1. The Statement of Additional Information of Jennison Fund dated October
27, 1995 (as supplemented April 15, 1996);
2. The Semi-Annual Report to Shareholders of Jennison Fund for the six-
months ended March 31, 1996;
3. Pages 1-5, 43-45, 47 and 51-59 of the Annual Report to Shareholders of
PIF relating to Growth Stock Fund for the year ended September 30,
1995; and
4. Pages 1-5, 37-39, 41 and 45-51 of the Semi-Annual Report to
Shareholders of PIF relating to Growth Stock Fund for the six-months
ended March 31, 1996.
The Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus and Proxy Statement dated July 25,
1996 relating to the above referenced matter. A copy of the Prospectus and
Proxy Statement may be obtained from Jennison Fund without charge by writing
or calling Jennison Fund, at the address or telephone number listed above.
1
<PAGE>
FINANCIAL STATEMENTS
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Growth Stock Fund will be
exchanged for Class Z shares of Jennison Fund and Jennison Fund will assume
the liabilities, if any, of Growth Stock Fund. Immediately thereafter, the
Class Z shares of Jennison Fund will be distributed to the shareholders of
Growth Stock Fund in a total liquidation of Growth Stock Fund. The following
pro forma financial statements include a pro forma Portfolio of Investments at
March 31, 1996, a pro forma Statement of Assets and Liabilities at March 31,
1996 and a pro forma Statement of Operations for the five months ended March
31, 1996.
PRO-FORMA PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
-------------------------------- ---------------------------------------
THE THE
PRUDENTIAL PRUDENTIAL
PRUDENTIAL INSTITUTIONAL PRUDENTIAL INSTITUTIONAL
JENNISON FUND, GROWTH JENNISON FUND, GROWTH
FUND STOCK FUND TOTAL FUND STOCK FUND TOTAL
---------- ------------- ------- ------------ ------------- ------------
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--
97.8%
COMMON STOCKS
AEROSPACE/DEFENSE--3.4%
94,500 115,500 210,000 Boeing Co............... $ 8,186,062 $ 10,005,187 $ 18,191,249
------------ ------------ ------------
AIRLINES--1.8%
56,800 56,800 AMR Corp. (a)........... 5,083,600 5,083,600
56,000 56,000 Delta Airlines, Inc..... 4,305,000 4,305,000
------------ ------------ ------------
4,305,000 5,083,600 9,388,600
------------ ------------ ------------
BEVERAGES--3.2%
35,100 40,800 75,900 Coca-Cola Co............ 2,900,138 3,371,100 6,271,238
80,000 87,300 167,300 PepsiCo. Inc............ 5,060,000 5,521,725 10,581,725
------------ ------------ ------------
7,960,138 8,892,825 16,852,963
------------ ------------ ------------
BIOTECHNOLOGY--1.1%
27,900 32,333 60,233 Chiron Corp. (a)........ 2,741,175 3,176,717 5,917,892
------------ ------------ ------------
BUSINESS SERVICES--7.9%
100,000 125,750 225,750 CUC International, Inc. 2,925,000 3,678,188 6,603,188
(a)....................
94,200 154,100 248,300 Eagle River Interactive, 1,224,600 2,003,300 3,227,900
Inc. (a)...............
59,600 68,833 128,433 First Data Corp......... 4,201,800 4,852,727 9,054,527
112,800 128,800 241,600 Omnicom Group, Inc...... 5,076,000 5,796,000 10,872,000
86,000 100,300 186,300 Reuters Holdings PLC
(ADR) (United Kingdom). 5,600,750 6,532,037 12,132,787
------------ ------------ ------------
19,028,150 22,862,252 41,890,402
------------ ------------ ------------
CELLULAR
COMMUNICATIONS--1.3%
85,300 101,500 186,800 Vodafone Group PLC (ADR)
(United Kingdom)....... 3,198,750 3,806,250 7,005,000
------------ ------------ ------------
COMPUTER
SYSTEMS/PERIPHERALS--
5.0%
168,800 206,900 375,700 EMC Corp. (a)........... 3,692,500 4,525,938 8,218,438
59,300 76,600 135,900 Hewlett-Packard Co...... 5,574,200 7,200,400 12,774,600
48,000 54,400 102,400 Seagate Technology, Inc. 2,628,000 2,978,400 5,606,400
(a)....................
------------ ------------ ------------
11,894,700 14,704,738 26,599,438
------------ ------------ ------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SHARES VALUE
-------------------------------- ---------------------------------------
THE THE
PRUDENTIAL PRUDENTIAL
PRUDENTIAL INSTITUTIONAL PRUDENTIAL INSTITUTIONAL
JENNISON FUND, GROWTH JENNISON FUND, GROWTH
FUND STOCK FUND TOTAL FUND STOCK FUND TOTAL
---------- ------------- ------- ------------ ------------- ------------
<C> <C> <C> <S> <C> <C> <C>
EDP SOFTWARE &
SERVICES--12.5%
72,000 110,800 182,800 America Online Inc...... $ 4,032,000 $ 6,204,800 $ 10,236,800
85,600 84,800 170,400 AutoDesk, Inc........... 3,231,400 3,201,200 6,432,600
75,600 93,950 169,550 Computer Associates 5,414,850 6,729,169 12,144,019
International, Inc. ...
62,000 69,200 131,200 General Motors Corp., 3,534,000 3,944,400 7,478,400
Class E................
48,700 60,500 109,200 Intuit Inc.............. 2,191,500 2,722,500 4,914,000
82,200 100,300 182,500 Macromedia Inc. (a)..... 3,514,050 4,287,825 7,801,875
47,000 57,100 104,100 Microsoft Corp. (a)..... 4,846,875 5,888,437 10,735,312
61,800 71,000 132,800 SAP AG (ADR) (Germany).. 2,950,950 3,390,250 6,341,200
------------ ------------ ------------
29,715,625 36,368,581 66,084,206
------------ ------------ ------------
FINANCIAL COMPANIES--
3.4%
148,300 184,700 333,000 Federal National 4,727,062 5,887,312 10,614,374
Mortgage Assn..........
70,500 70,500 Mutual Risk Management, 2,916,938 2,916,938
Ltd....................
106,600 106,600 The PMI Group Inc....... 4,650,425 4,650,425
------------ ------------ ------------
4,727,062 13,454,675 18,181,737
------------ ------------ ------------
HEALTH CARE SERVICES--
4.4%
96,000 96,000 Healthsouth Corp. (a)... 3,264,000 3,264,000
78,400 90,300 168,700 PhyCor, Inc. (a)........ 3,449,600 3,973,200 7,422,800
92,600 112,500 205,100 United Healthcare Corp.. 5,694,900 6,918,750 12,613,650
------------ ------------ ------------
12,408,500 10,891,950 23,300,450
------------ ------------ ------------
HOUSEHOLD & PERSONAL
CARE PRODUCTS--0.9%
28,900 34,100 63,000 Duracell International, 1,434,163 1,692,213 3,126,376
Inc....................
61,900 66,700 128,600 Gillette Co............. 3,203,325 3,451,725 6,655,050
------------ ------------ ------------
4,637,488 5,143,938 9,781,426
------------ ------------ ------------
HOTELS--2.3%
20,500 24,400 44,900 Hilton Hotels Corp...... 1,927,000 2,293,600 4,220,600
63,300 72,200 135,500 ITT Corp. (New)......... 3,798,000 4,332,000 8,130,000
------------ ------------ ------------
5,725,000 6,625,600 12,350,600
------------ ------------ ------------
INDUSTRIAL
TECH/INSTRUMENTS--1.2%
81,900 104,300 186,200 Symbol Technologies,
Inc. (a)............... 2,876,738 3,663,538 6,540,276
------------ ------------ ------------
INSURANCE--3.3%
28,800 33,100 61,900 CIGNA Corp.............. 3,290,400 3,781,675 7,072,075
49,700 63,700 113,400 ITT Hartford Group,
Inc.................... 2,435,300 3,121,300 5,556,600
83,400 83,400 MGIC Investment Corp.... 4,545,300 4,545,300
------------ ------------ ------------
10,271,000 6,902,975 17,173,975
------------ ------------ ------------
MACHINERY--1.1%
66,400 83,700 150,100 Harnischfeger
Industries, Inc........ 2,573,000 3,243,375 5,816,375
------------ ------------ ------------
MEDIA--4.6%
93,600 93,600 Clear Channel
Communications, Inc.
(a).................... 5,288,400 5,288,400
115,400 132,500 247,900 Disney (Walt) Co........ 7,371,175 8,463,437 15,834,612
73,300 73,300 Infinity Broadcasting
Corp., Class A (a)..... 3,179,388 3,179,388
------------ ------------ ------------
10,550,563 13,751,837 24,302,400
------------ ------------ ------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SHARES VALUE
-------------------------------- ---------------------------------------
THE THE
PRUDENTIAL PRUDENTIAL
PRUDENTIAL INSTITUTIONAL PRUDENTIAL INSTITUTIONAL
JENNISON FUND, GROWTH JENNISON FUND, GROWTH
FUND STOCK FUND TOTAL FUND STOCK FUND TOTAL
---------- ------------- ------- ------------ ------------- ------------
<C> <C> <C> <S> <C> <C> <C>
MISCELLANEOUS BASIC
INDUSTRY--0.5%
77,500 77,500 Applied Materials, Inc.
(a).................... 2,702,813 2,702,813
------------ ------------
NETWORKING--3.9%
128,900 162,800 291,700 Cisco Systems, Inc. (a). $ 5,977,737 $ 7,549,850 $ 13,527,587
86,500 93,400 179,900 3Com Corp. (a).......... 3,449,187 3,724,325 7,173,512
------------ ------------ ------------
9,426,924 11,274,175 20,701,099
------------ ------------ ------------
OIL SERVICES--1.1%
31,500 39,100 70,600 Schlumberger, Ltd. (ADR)
(Netherlands).......... 2,492,438 3,093,788 5,586,226
------------ ------------ ------------
PHARMACEUTICALS--11.7%
124,800 156,500 281,300 Astra AB Class A (ADR)
(Sweden)............... 5,787,600 7,234,170 13,021,770
51,900 3,170 55,070 Ciba-Geigy AG (ADR)
(Switzerland).......... 3,230,775 3,961,502 7,192,277
47,700 58,300 106,000 Johnson & Johnson Co.... 4,400,325 5,378,175 9,778,500
76,000 98,200 174,200 Lily (Eli) & Co......... 4,940,000 6,383,000 11,323,000
76,900 80,000 156,900 Pfizer Inc.............. 5,152,300 5,360,000 10,512,300
83,900 108,900 192,800 Smith Kline Beechman PLC
(ADR) (United Kingdom). 4,320,850 5,608,350 9,929,200
------------ ------------ ------------
27,831,850 33,925,197 61,757,047
------------ ------------ ------------
PUBLISHING--1.3%
44,700 54,700 99,400 Scholastic Corp. (a).... 3,073,125 3,760,625 6,833,750
------------ ------------ ------------
RESTAURANTS--0.9%
122,500 122,500 Lone Star Steakhouse &
Saloon, Inc. (a)....... 4,685,625 4,685,625
------------ ------------
RETAIL--9.9%
139,900 153,100 293,000 AutoZone, Inc. (a)...... 4,739,112 5,186,262 9,925,374
90,000 117,100 207,100 Corporate Express, Inc.
(a).................... 2,970,000 3,864,300 6,834,300
138,500 168,000 306,500 General Nutrition
Companies, Inc......... 3,462,500 4,200,000 7,662,500
115,400 137,400 252,800 Gymboree Corp. (a)...... 3,014,825 3,589,575 6,604,400
70,300 74,833 145,133 Home Depot, Inc. (a).... 3,365,613 3,582,630 6,948,243
50,200 65,400 115,600 Kohl's Corp. (a)........ 3,181,425 4,144,725 7,326,150
55,800 73,900 129,700 Micro Warehouse, Inc.
(a).................... 2,315,700 3,066,850 5,382,550
22,200 22,200 NIKE, Inc............... 1,803,750 1,803,750
------------ ------------ ------------
24,852,925 27,634,342 52,487,267
------------ ------------ ------------
SEMICONDUCTORS & RELATED
DEVICES--4.3%
82,500 96,700 179,200 Intel Corp.............. 4,692,187 5,499,812 10,191,999
135,500 135,500 International Rectifer
Corp. (a).............. 2,439,000 2,439,000
105,300 105,300 KLA Instruments Corp.
(a).................... 2,382,412 2,382,412
135,600 160,900 296,500 LSI Logic Corp.......... 3,627,300 4,304,075 7,931,375
------------ ------------ ------------
13,140,899 9,803,887 22,944,786
------------ ------------ ------------
TECHNOLOGY--0.3%
41,500 41,500 Broderbound Software
Inc.................... 1,566,625 1,566,625
------------ ------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SHARES VALUE
--------------------------------- ---------------------------------------
THE THE
PRUDENTIAL PRUDENTIAL
PRUDENTIAL INSTITUTIONAL PRUDENTIAL INSTITUTIONAL
JENNISON FUND, GROWTH JENNISON FUND, GROWTH
FUND STOCK FUND TOTAL FUND STOCK FUND TOTAL
---------- ------------- -------- ------------ ------------- ------------
<C> <C> <C> <S> <C> <C> <C>
TELECOMMUNICATIONS
EQUIPMENT--3.2%
110,200 136,600 246,800 Ericsson (L.M.)
Telephone Co. (ADR)
(Sweden)............... $ 2,355,525 $ 2,919,825 $ 5,275,350
47,000 54,600 101,600 Nokia Corp. (ADR) 1,609,750 1,870,050 3,479,800
(Finland)...............
76,600 97,000 173,600 Tellabs, Inc. (a)....... 3,705,525 4,692,375 8,397,900
------------ ------------ ------------
7,670,800 9,482,250 17,153,050
------------ ------------ ------------
TELEPHONES--1.7%
141,900 161,700 303,600 MCI Communications 4,292,475 4,891,425 9,183,900
Corp. ..................
------------ ------------ ------------
TRANSPORTATION--0.6%
44,400 44,400 Wisconsin Central 2,952,600 2,952,600
Transportation Corp.
(a).....................
------------ ------------
TOTAL LONG-TERM
INVESTMENTS
(cost $441,156,280)..... 233,580,387 284,351,390 517,931,777
------------ ------------ ------------
<CAPTION>
PRINCIPAL AMOUNT (000)
---------------------------------
<C> <C> <C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS--
2.0%
CORPORATE NOTES--1.2%
$6,684 $6,684 Ford Motor Credit Corp.
5.38%, 4/1/96
(cost $6,684,000)...... 6,684,000 6,684,000
------------ ------------
REPURCHASE AGREEMENT--
0.8%
$4,122 4,122 Joint Repurchase
Agreement Account,
5.353702%, 04/01/96
(cost $4,122,000)...... 4,122,000 4,122,000
------------ ------------
TOTAL SHORT-TERM
INVESTMENTS
(cost $10,806,000)...... 6,684,000 4,122,000 10,806,000
------------ ------------ ------------
TOTAL INVESTMENTS-- 240,264,387 288,473,390 528,737,777
99.8%...................
(cost $451,962,280)
OTHER ASSETS IN EXCESS 644,936 398,096 1,043,032
OF LIABILITIES--0.2%....
------------ ------------ ------------
NET ASSETS--100%........ $240,909,323 $288,871,486 $529,780,809
============ ============ ============
</TABLE>
- --------
(a) Non-incoming producing security
ADR--American Depository Receipt.
5
<PAGE>
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THE
PRUDENTIAL PRUDENTIAL INSTITUTIONAL
JENNISON FUND, GROWTH STOCK PRO-FORMA
FUND, INC. FUND COMBINED
------------ ------------------------ ------------
<S> <C> <C> <C>
ASSETS
Investments, at value
(cost $226,722,850;
$225,239,430 and
$451,962,280, respective-
ly)...................... $240,264,387 $288,473,390 $528,737,777
Cash...................... 44,293 571 44,864
Receivable for Fund shares
sold..................... 3,613,745 836,874 4,450,619
Receivable for investments
sold..................... 1,360,851 1,843,811 3,204,662
Dividends and interest re-
ceivable................. 208,417 244,056 452,473
Deferred expenses and
other assets............. 230,130 22,618 252,748
------------ ------------ ------------
Total assets.......... 245,721,823 291,421,320 537,143,143
------------ ------------ ------------
LIABILITIES
Payable for investments
purchased................ 3,428,870 1,894,523 5,323,393
Payable for Fund shares
reacquired............... 902,502 379,951 1,282,453
Distribution fees payable. 152,124 -- 152,124
Management fee payable.... 117,860 184,161 302,021
Administration fee pay-
able..................... -- 32,006 32,006
Accrued expenses and other
liabilities.............. 211,144 59,193 270,337
------------ ------------ ------------
Total liabilities..... 4,812,500 2,549,834 7,362,334
------------ ------------ ------------
Net Assets................ $240,909,323 $288,871,486 $529,780,809
============ ============ ============
Net assets were comprised
of:
Common stock, at par.... $ 23,243 $ 16,906 $ 51,046
Paid-in capital in ex-
cess of par............ 233,402,585 223,817,874 457,209,562
------------ ------------ ------------
233,425,828 223,834,780 457,260,608
Accumulated net invest-
ment loss.............. (469,661) (362,804) (832,465)
Accumulated net realized
gain (loss) on invest-
ments.................. (5,588,381) 2,165,314 (3,423,067)
Net unrealized apprecia-
tion on investments.... 13,541,537 63,234,196 76,775,733
------------ ------------ ------------
Net assets, March 31,
1996................... $240,909,323 $288,871,486 $529,780,809
============ ============ ============
Class A:
Net asset value and re-
demption price per
share.................. $ 10.39 $ 10.39
Maximum sales charge
(5.00% of offering
price)................. 0.55 0.55
------------ ------------
Maximum offering price
to public.............. $ 10.94 $ 10.94
============ ============
Class B:
Net asset value, offer-
ing price and redemp-
tion price per share... $ 10.36 $ 10.36
============ ============
Class C:
Net asset value, offer-
ing price and redemp-
tion price per share... $ 10.36 $ 10.36
============ ============
Predecessor Class/Class Z:
Net asset value, offer-
ing price and redemp-
tion price per share... $ 17.09 $ 10.39
============ ============
</TABLE>
6
<PAGE>
PRO-FORMA STATEMENT OF OPERATIONS
FOR THE FIVE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL INSTITUTIONAL
JENNISON GROWTH STOCK PRO-FORMA PRO-FORMA
FUND, INC. FUND ADJUSTMENTS COMBINED
----------- ------------------------ ----------- -----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends............. $ 578,402 $ 757,773 $ 1,336,175
Interest.............. 283,597 113,451 397,048
----------- ----------- -----------
Total income........ 861,999 871,224 1,733,223
----------- ----------- -----------
Expenses
Distribution fee--
Class A.............. 62,056 -- 62,056
Distribution fee--
Class B.............. 495,519 -- 495,519
Distribution fee--
Class C.............. 43,189 -- 43,189
Management fee........ 472,159 752,118 $(107,445)(a) 1,116,832
Administration fee.... -- 142,757 (142,757)(b) --
Transfer agent's fees
and expenses......... 64,000 24,566 211,434 (c) 300,000
Registration fees..... 63,000 28,918 91,918
Custodian's fees and
expenses............. 38,000 38,547 (20,000)(d) 56,547
Reports to sharehold-
ers.................. 36,000 12,459 48,459
Amortization of
deferred organization
expense.............. 20,663 5,557 (5,557)(e) 20,663
Audit fee and ex-
penses............... 12,500 4,984 (4,984)(e) 12,500
Directors' fees....... 11,250 5,274 (5,274)(e) 11,250
Legal fees and ex-
penses............... 9,000 6,568 (6,568)(e) 9,000
Miscellaneous......... 4,324 1,176 5,500
----------- ----------- --------- -----------
Total expenses...... 1,331,660 1,022,924 (81,151) 2,273,433
Expense recovery...... -- 51,530 (51,530)(f) --
----------- ----------- --------- -----------
Net expenses........ 1,331,660 1,074,454 (132,681) 2,273,433
----------- ----------- --------- -----------
Net investment loss..... (469,661) (203,230) 132,681 (540,210)
----------- ----------- --------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENT AND
FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss)
on:
Investment transac-
tions................ (5,588,381) 4,749,295 (839,086)
Foreign currency
transactions......... -- (63,447) (63,447)
----------- ----------- -----------
(5,588,381) 4,685,848 (902,533)
----------- ----------- -----------
Net unrealized apprecia-
tion on investments.... 13,541,537 9,261,380 22,802,917
----------- ----------- -----------
Net gain on investments
and foreign currency
transactions........... 7,953,156 13,947,228 21,900,384
----------- ----------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $ 7,483,495 $13,743,998 $ 132,681 $21,360,174
=========== =========== ========= ===========
</TABLE>
- --------
(a) Adjustment to reflect reduction in management fee from .70% to .60%
annually
(b) Adjustment to reflect elimination of administration fee
(c) Adjustment to reflect new transfer agency fee arrangement
(d) Adjustment to reflect economies of scale
(e) Adjustment to reflect elimination of duplicate expenses
(f) Adjustment to reflect discontinuation of expense cap/recovery arrangement
7
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
Prudential Jennison Fund, Inc (the "Fund"), which was incorporated in
Maryland on August 10, 1995, is registered under the Investment Company Act of
1940 as a diversified, open-end management investment company. The Fund had no
significant operations other than the issuance of 3,334 shares of Class A and
3,333 shares of each Class B and Class C common stock for $100,000 on
September 13, 1995 to Prudential Mutual Fund Management, Inc. ("PMF").
Investment operations commenced on November 2, 1995.
The Fund's investment objective is to achieve long-term growth of capital by
investing primarily in equity securities (common stock, preferred stock and
securities convertible into common stock) of established companies with above-
average growth prospects.
The preceding are pro forma financial statements which give effect to the
proposed transaction whereby all of the assets of Growth Stock Fund of The
Prudential Institutional Fund ("Growth Stock Fund") will be exchanged for the
Class Z shares of common stock of the Fund and the assumption by the Fund of
the liabilities of Growth Stock Fund. Immediately after the exchange Class Z
shares of the Fund will be distributed to shareholders of Growth Stock Fund
and Growth Stock Fund will be liquidated. The preceding financial statements
include a pro forma Portfolio of Investments and Statement of Assets and
Liabilities at March 31, 1996, and pro forma Statement of Operations for the
five months ended March 31, 1996.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATION: Securities listed on a securities exchange (other than
options on securities and indices) are valued at the last sales price on the
day of valuation, or, if there was no sale on such day, at the average of
readily available closing bid and asked prices on such day as provided by a
pricing service. 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 average of the most recently quoted
bid and asked prices provided by a principle market maker or dealer. Options
on securities and indices traded on an exchange are valued at the average of
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 market
quotations are not readily available are valued at fair value as 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.
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 or losses on sales of
securities are calculated on the identified cost basis. Dividend income is
recorded on the ex-dividend date; 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.
8
<PAGE>
Net investment income (loss), other than distribution fees, and realized and
unrealized 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.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net
investment income, if any, semi-annually and to make distributions of any net
capital gains at least annually. Dividends and distributions are recorded on
the ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
TAXES: It is the Fund's policy to meet the requirement of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its taxable net income to its shareholders. Therefore, no federal
income tax provision is required.
DEFERRED ORGANIZATION EXPENSES: Approximately $250,000 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.
REORGANIZATION AND SOLICITATION EXPENSE: Expenses of reorganization and
solicitation will be borne by Growth Stock Fund and the Fund in proportion to
their respective assets and will include reimbursement of brokerage firms and
others for expenses in forwarding proxy solicitation material to shareholders.
NOTE 2. AGREEMENTS
The Fund has entered into a management agreement with PMF. PMF is an
indirect wholly-owned subsidiary of The Prudential Insurance Company of
America ("Prudential").
The management fee paid PMF will be computed daily and payable monthly, at
an annual rate of .60 of 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and Jennison Associates
Capital Corp. ("Jennison"), a wholly-owned subsidiary of Prudential, Jennison
furnishes investment advisory services in connection with the management of
the Fund. Under the Subadvisory Agreement, Jennison, subject to the
supervision of PMF, is responsible for managing the assets of the Fund in
accordance with its investment objectives, investment program and policies.
Jennison determines what securities and other instruments are purchased and
sold for the Fund and is responsible for obtaining and evaluating financial
data relevant to the Fund.
PMF pays Jennison a subadvisory fee at an annual rate of .30 of 1% of the
average daily net assets of the Fund up to and including $300 million and .25
of 1% of such assets in excess of $300 million. PMF also pays the cost of
compensation of officers and employees of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
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, pursuant to plans of distribution, (the "Class A,
B, and C Plans") regardless of expenses actually incurred by them. The
distribution fees are accrued daily and payable monthly.
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,
9
<PAGE>
respectively. With respect to the Class A Plan, PSI has agreed to limit its
distribution-related costs to .25 of 1% of average daily net assets for the
fiscal year ending September 30, 1996. With respect to the Class B and Class C
Plans, the Fund compensates PSI for its distribution-related fees at an annual
rate of 1% of the average daily net assets. PSI is not compensated as
distributor of Class Z shares.
PMF, Jennisen and PSI are indirect, wholly-owned subsidiaries of The
Prudential Insurance Company of America.
10
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
Statement of Additional Information
dated October 27, 1995
(as supplemented April 15, 1996)
Prudential Jennison Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth
of capital. The Fund seeks to achieve this objective by investing primarily in
equity securities (common stock, preferred stock and securities convertible
into common stock) of established companies with above-average growth
prospects. Current income, if any, is incidental. Under normal market
conditions, the Fund intends to invest at least 65% of its total assets in
equity securities of companies that exceed $1 billion in market
capitalization. The Fund may also invest in (i) equity securities of other
companies including foreign issuers, (ii) investment grade fixed-income
securities and (iii) obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, including mortgage-backed securities. The
Fund may engage in various derivative securities transactions, such as options
on stocks, stock indices and foreign currencies, foreign currency exchange
contracts and the purchase and sale of futures contracts on stock indices and
options thereon to hedge its portfolio and to attempt to enhance return. There
can be no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, 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 Fund's Prospectus dated October 27, 1995, (as
supplemented April 15, 1996) a copy of which may be obtained from the Fund
upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
Investment Objective and Policies......................... B-2 5
Investment Restrictions................................... B-10 13
Directors and Officers.................................... B-12 13
Manager................................................... B-14 13
Distributor............................................... B-16 14
Portfolio Transactions and Brokerage...................... B-18 16
Purchase and Redemption of Fund Shares.................... B-19 20
Shareholder Investment Account............................ B-21 20
Net Asset Value........................................... B-25 16
Taxes..................................................... B-26 17
Performance Information................................... B-28 17
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................... B-29 16
Independent Auditors' Report.............................. B-30 --
Financial Statements...................................... B-31 --
Appendix -- Historical Performance Data................... A-1 --
Appendix -- General Investment Information................ A-5 --
Appendix -- Information Relating to The Prudential........ A-6 --
</TABLE>
- -------------------------------------------------------------------------------
MF168B
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. The Fund
seeks to achieve this objective by investing primarily in equity securities
(common stock, preferred stock and securities convertible into common stock)
of established companies with above-average growth prospects. Current income,
if any, is incidental. Under normal market conditions, the Fund intends to
invest at least 65% of its total assets in equity securities of companies that
exceed $1 billion in market capitalization. See "How the Fund Invests--
Investment Objective and Policies" in the Prospectus. There can be no
assurance that the Fund's investment objective will be achieved.
The term "investment adviser" as used herein refers to Jennison Associates
Capital Corp., the Subadviser. See "Manager" below.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments 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, the lengths of
their maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These
obligations, including those which are guaranteed by Federal agencies or
instrumentalities, may or may not be backed by the full faith and credit of
the United States. Obligations of the Government National Mortgage Association
(GNMA), the Farmers Home Administration and the Small Business Administration
are backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Fund must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim
against the United States if the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest which are not backed by
the full faith and credit of the United States include obligations such as
those issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association, the Student
Loan Marketing Association, Resolution Funding Corporation and the Tennessee
Valley Authority, each of which has the right to borrow from the U.S. Treasury
to meet its obligations, and obligations of the Farm Credit System, the
obligations of which may be satisfied only by the individual credit of the
issuing agency. FHLMC investments may include collateralized mortgage
obligations. See "Other Investments and Investment Techniques" below.
Obligations issued or guaranteed as to principal and interest by the United
States Government may be acquired by the Fund in the form of custodial
receipts that evidence ownership of future interest payments, principal
payments or both on certain United States Treasury notes or bonds. Such notes
and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities,
including those which represent undivided ownership interests in pools of
mortgages. The U.S. Government or the issuing agency or instrumentality
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
nor do the guarantees extend to the yield or value of the Fund's shares. 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. Because the
prepayment characteristics of the underlying mortgages vary, it is not
possible to predict accurately the average life of a particular issue of pass-
through certificates. Mortgage-backed securities are often subject to more
rapid repayment than their maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying mortgage
obligations. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
The Fund's ability to invest in high-yielding mortgage-backed securities will
be adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses.
The Fund may invest in both Adjustable Rate Mortgage Securities (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods
of falling U.S. interest rates, the values of U.S. Government securities
generally rise and, conversely, during periods of rising interest rates, the
values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer-term
maturities.
B-2
<PAGE>
FOREIGN DEBT SECURITIES
The Fund is permitted to invest in foreign corporate and government
securities. "Foreign Government securities" include debt securities issued or
securities. "Foreign Government securities" include debt securities issued or
guaranteed, as to payment of principal and interest, by governments, quasi-
governmental entities, governmental agencies, supranational entities and other
governmental entities (collectively, Government Entities) of foreign countries
denominated in the currencies of such countries or in U.S. dollars (including
debt securities of a Government Entity in any such country denominated in the
currency of another such country).
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank
(International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of "quasi-
governmental entities" are issued by entities owned by a national, state, or
equivalent government or are obligations of a political unit that are not
backed by the national government's "full faith and credit" and general taxing
powers. Examples of quasi-government issuers include, among others, the
Province of Ontario and the City of Stockholm. "Foreign government securities"
shall also include debt securities of Government Entities denominated in
European Currency Units. A European Currency Unit represents specified amounts
of the currencies of certain of the member states of the European Community.
OPTIONS ON SECURITIES
The Fund may purchase and write (i.e., sell) put and call options on
securities that are traded on U.S. or foreign securities exchanges or that are
traded in the over-the-counter markets. A call option is a short-term contract
pursuant to which the purchaser, in return for a premium paid, has the right
to buy the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives the purchaser, in return for a
premium, the right to sell the underlying security at a specified price during
the term of the option. The writer of the put, who receives the premium, has
the obligation to buy the underlying security upon exercise at the exercise
price. The Fund will generally write put options when its investment adviser
desires to invest in the underlying security. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than
the exercise price of the call written if the difference is maintained by the
Fund in cash, U.S. Government securities or other liquid high-grade debt
obligations in a segregated account with its Custodian. A put option written
by the Fund is "covered" if the Fund maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value equal to
the exercise price in a segregated account with its Custodian, or else holds
on a share-for-share basis a put on the same security as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written.
If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he or she had been notified of the exercise of an option. Similarly, an
investor who is the holder of an option may liquidate his or her position by
effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is generally required to
pledge for the benefit of the broker the underlying security or other assets
in accordance with the rules of the relevant exchange or clearinghouse, such
as The Options Clearing Corporation (OCC), an institution created to interpose
itself between buyers and sellers of options in the United States.
Technically, the clearinghouse assumes the other side of every purchase and
sale transaction on an exchange and, by doing so, guarantees the transaction.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option may be
offset in whole or in part if the Fund holds the underlying security by
appreciation of the underlying security owned by the Fund.
B-3
<PAGE>
The Fund may also purchase a "protective put," i.e., a put option acquired
for the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund acquires
the right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value.
The loss to the Fund is limited to the premium paid for, and transaction costs
in connection with, the put plus the initial excess, if any, of the market
price of the underlying security over the exercise price. However, if the
market price of the security underlying the put rises, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for
the put option less any amount (net of transaction costs) for which the put
may be sold. Similar principles apply to the purchase of puts on stock
indices, as described below.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, the
Fund may also purchase and sell put and call options on securities indices
traded on U.S. or foreign securities exchanges or traded in the over-the-
counter markets. Options on securities indices are similar to options on
securities except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the securities index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple (the multiplier). The writer
of the option is obligated, in return for the premium received, to make
delivery of this amount. All settlements on options on indices are in cash,
and gain or loss depends on price movements in the securities market generally
(or in a particular industry or segment of the market) rather than price
movements in individual securities.
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an
option and the current level of the underlying index. A multiplier of 100
means that a one-point difference will yield $100. Options on different
indices may have different multipliers. Because exercises of index options are
settled in cash, a call writer cannot determine the amount of its settlement
obligations in advance and, unlike call writing on specific stocks, cannot
provide in advance for, or cover, its potential settlement obligations by
acquiring and holding the underlying securities. In addition, unless the Fund
has other liquid assets which are sufficient to satisfy the exercise of a
call, the Fund would be required to liquidate portfolio securities or borrow
in order to satisfy the exercise.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Fund
will realize a gain or loss on the purchase or sale of an option on an index
depends upon movements in the level of security prices in the market generally
or in an industry or market segment rather than movements in the price of a
particular security. Accordingly, successful use by the Fund of options on
indices would be subject to the investment adviser's ability to predict
correctly movements in the direction of the securities market generally or of
a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
RISKS OF TRANSACTIONS IN OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. In such event it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders. The Fund intends to purchase
and sell only those options which are cleared by clearinghouses whose
facilities are considered to be adequate to handle the volume of options
transactions.
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<PAGE>
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that
are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities
in the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES
Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in
advance and, unlike call writing on specific stocks, cannot provide in advance
for, or cover, its potential settlement obligations by acquiring and holding
the underlying securities. However, the Fund will write call options on
indices only under the circumstances described below under "Limitations on
Purchase and Sale of Stock Options, Options on Stock Indices and Foreign
Currencies and Futures Contracts and Related Options."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the
Fund's portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund in the opposite
direction as the market would be likely to occur for only a short period or to
a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of the Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such investments might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on
the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Fund exercises the call it holds or the time
the Fund sells the call which, in either case, would occur no earlier than the
day following the day the exercise notice was filed.
If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that
the level of the underlying index may change before closing. 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. Although the Fund may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the
cutoff times for index options may be earlier than those fixed for other types
of options and may occur before definitive closing index values are announced.
RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar
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<PAGE>
price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the
period between the date on which the security is purchased or sold, or on
which the dividend or interest payment declared, and the date on which such
payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. If
the Fund enters into a hedging transaction as described above, the transaction
will be "covered" by the position being hedged, or the Fund's Custodian will
place cash, U.S. government securities, or other liquid high-grade debt
obligations into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts (less the value of the covering positions,
if any). If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so that
the value of the account will, at all times, equal the amount of the Fund's
net commitments with respect to such contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of
the foreign currency and if the market value of the security is less than the
amount of foreign currency that the Fund is obligated to deliver, then it
would be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices
decline during the period between the Fund's entering into a forward contract
for the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Fund will realize a
gain to the extent that the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund
is not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of the Fund's portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures contracts as a
hedging device. In the case of futures contracts on securities indices, the
correlation between the price of the futures contract and the movements in the
index may not be perfect. Therefore, a correct forecast of market trends by
the investment adviser may still not result in a successful hedging
transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance
that it will be possible, at any particular time, to close a futures position.
In the event the Fund could not close a futures position and the value of such
position declined, the Fund would be required to continue to make daily cash
payments of variation margin. Currently, index futures contracts are available
on various U.S. and foreign securities indices.
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<PAGE>
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of markets and other factors affecting the securities market
generally. If the Fund has insufficient cash to meet daily variation margin
requirements, it may need to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a
time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be
reflected in the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of
the option is required upon exercise to assume an offsetting futures position
(a short position if the option is a call and a long position if the option is
a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account which represents the amount by which the market price of the futures
contract, at exercise, exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract. With
respect to stock indices, options are traded on futures contracts for various
U.S. and foreign stock indices including the S&P 500 Stock Index and the NYSE
Composite Index.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES
AND FOREIGN CURRENCIES AND FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may write put and call options on stocks only if they are covered
as described above, and such options must remain covered so long as the Fund
is obligated as a writer. The Fund will write put options on stock indices and
foreign currencies only if they are covered by segregating with the Fund's
Custodian an amount of cash, U.S. Government securities, or other high grade,
liquid debt obligations equal to the aggregate exercise price of the puts. The
Fund has undertaken with certain state securities commissions that, so long as
shares of the Fund are registered in those states, it will not (a) write puts
having aggregate exercise prices greater than 25% of total net assets; or (b)
purchase (i) put options on stocks not held in the Fund's portfolio, (ii) put
options on stock indices or foreign currencies or (iii) call options on
stocks, stock indices or foreign currencies if, after any such purchase, the
aggregate premiums paid for such options would exceed 10% of the Fund's total
net assets; provided, however, that the Fund may purchase put options on
stocks held by the Fund if after such purchase the aggregate premiums paid for
such options do not exceed 20% of the Fund's net assets. In addition, the Fund
will not enter into futures contracts or related options if the aggregate
initial margin and premiums exceed 5% of the liquidation value of the Fund's
total assets, taking into account unrealized profits and losses on such
contracts, provided, however, that in the case of an option that is in-the-
money, the in-the-money amount may be excluded in computing such 5%. The above
restriction does not apply to the purchase or sale of futures contracts and
related options for bona fide hedging purposes, within the meaning of
regulations of the Commodity Futures Trading Commission. The Fund does not
intend to purchase options on equity securities or securities indices if the
aggregate premiums paid for such outstanding options would exceed 10% of the
Fund's total assets.
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, U.S. Government securities, liquid high-grade
debt securities or a portfolio of stocks substantially replicating the
movement of the index, in the judgment of the Fund's investment adviser, with
a market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," all of which
are stocks of issuers in such industry or market segment, and that, in the
judgment of the investment adviser, substantially replicate the movement of
the index with a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times the number of
contracts. Such stocks will include stocks which represent at least 50% of the
weighting of the industry or market segment index and will represent at least
50% of the Fund's holdings in that industry or market segment. No individual
security will represent more
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<PAGE>
than 15% of the amount so segregated, pledged or escrowed in the case of
broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options. If at the close of business on any
day the market value of such qualified securities so segregated, escrowed or
pledged falls below 100% of the current index value times the multiplier times
the number of contracts, the Fund will so segregate, escrow or pledge an
amount in cash, U.S. Government securities or other high-grade short-term debt
obligations equal in value to the difference. In addition, when the Fund
writes a call on an index which is in-the-money at the time the call is
written, the Fund will segregate with its Custodian or pledge to the broker as
collateral cash, U.S. Government securities or other high-grade short-term
debt obligations equal in value to the amount by which the call is in-the-
money times the multiplier times the number of contracts. Any amount
segregated pursuant to the foregoing sentence may be applied to the Fund's
obligation to segregate additional amounts in the event that the market value
of the qualified securities falls below 100% of the current index value times
the multiplier times the number of contracts. A "qualified security" is an
equity security which is listed on a national securities exchange or listed on
NASDAQ against which the Fund has not written a stock call option and which
has not been hedged by the Fund by the sale of stock index futures. However,
if the Fund holds a call on the same index as the call written where the
exercise price of the call held is equal to or less than the exercise price of
the call written or greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other high-
grade short-term obligations in a segregated account with its Custodian, it
will not be subject to the requirements described in this paragraph.
POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest in money market instruments, including commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, obligations issued or guaranteed by
the U.S. Government, its agencies or its instrumentalities and repurchase
agreements (described more fully below). Such investments may be subject to
certain risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, the seizure or
nationalization of foreign deposits and foreign exchange controls or other
restrictions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place a month or more after the date of the
transaction. The Fund will make commitments for such when-issued transactions
only with the intention of actually acquiring the securities. The Fund's
Custodian will maintain, in a separate account of the Fund, cash, U.S.
Government securities or other liquid high-grade debt obligations having a
value equal to or greater than such commitments. If the Fund chooses to
dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
security, incur a gain or loss due to market fluctuations.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box), and that not more than 25% of the Fund's net
assets (determined at the time of the short sale) may be subject to such
sales. Short sales will be made primarily to defer realization of gain or loss
for federal tax purposes. As a matter of current operating policy, the Fund
will not engage in short sales other than short sales against-the-box.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Board of
Directors. The Fund's investment adviser will monitor the creditworthiness of
such parties, under the general supervision of the Board of Directors. 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.
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<PAGE>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral
(including a letter of credit) that is equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is
that the Fund continues to receive payments in lieu of the interest and
dividends of the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested
in short-term obligations.
A loan may be terminated by the Fund at any time. If the borrower fails to
maintain the requisite amount of collateral, the loan automatically
terminates, and the Fund could use the collateral to replace the securities
while holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms determined to be creditworthy pursuant
to procedures approved by the Board of Directors of the Fund. On termination
of the loan, the borrower is required to return the securities to the Fund,
and any gain or loss in the market price during the loan would inure to the
Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated at the time of the borrowing) from banks 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 300%
asset coverage should decline as a result of market fluctuations or other
reasons, the Fund may be required to sell portfolio securities to reduce the
debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
Such liquidations could cause the Fund to realize gains on securities held for
less than three months. Because no more than 30% of the Fund's gross income
may be derived from the sale or disposition of securities held for less than
three months to maintain the Fund's status as a regulated investment company
under the Internal Revenue Code, such gains would limit the ability of the
Fund to sell other securities held for less than three months that the Fund
might wish to sell. See "Taxes." The Fund will not purchase portfolio
securities when borrowings exceed 5% of the value of its total assets.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased and may exceed the income from the
securities purchased. In addition, the Fund may be required to maintain
minimum average balances in connection with such borrowing or pay a commitment
fee to maintain a line of credit which would increase the cost of borrowing
over the stated interest rate.
ILLIQUID SECURITIES
The Fund may not hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
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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, convertible 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 under 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 and foreign securities will expand further as a
result of this 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 under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider, inter alia, 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
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, the Fund does not intend to invest in such
securities. If the Fund does invest in securities of other investment
companies, shareholders of the Fund may be subject to duplicate management and
advisory fees. See "Investment Restrictions."
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 100%. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio
purchases or sales (excluding all securities, including options, whose
maturities or expiration date at acquisition were one year or less) by the
monthly average value of the portfolio. High portfolio turnover (over 100%)
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions
to shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Portfolio Transactions and Brokerage" and "Taxes."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding voting shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
B-10
<PAGE>
2. Make short sales of securities or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be
(i) deposited as collateral for the obligation to replace securities borrowed
to effect short sales and (ii) allocated to segregated accounts in connection
with short sales. Short sales "against-the-box" are not subject to this
limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund 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, forward foreign currency exchange contracts and
collateral arrangements relating thereto, and collateral arrangements with
respect to futures contracts and options thereon and with respect to the
writing of options and obligations of the Fund to Directors pursuant to
deferred compensation arrangements are not deemed to be a pledge of assets or
the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single
issuer, or (ii) 25% or more of the Fund's total assets (determined at the time
of the investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government
agency or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
6. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate, securities
of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.
7. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon. (For
purposes of this restriction, futures contracts on currencies and on
securities indices and forward foreign currency exchange contracts are not
deemed to be commodities or commodity contracts.)
8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws. The Fund has not adopted a fundamental
investment policy with respect to investments in restricted securities. See
"Illiquid Securities."
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5%
of its total assets in any one investment company and will not have invested
more than 10% of its total assets (determined at the time of investment) in
such securities of one or more investment companies, or except as part of a
merger, consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
12. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
13. Purchase more than 10% of all outstanding voting securities of any one
issuer.
In order to comply with certain "blue sky" restrictions, the Fund will not
as a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. Invest in securities of any issuer if any officer or Director of the Fund
or the Fund's Manager or Subadviser (as defined below) owns more than 1/2 of
1% of the outstanding securities of such issuer, and such officers and
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
B-11
<PAGE>
3. Purchase warrants if as a result the Fund would then have more than 5% of
its assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange or a major foreign exchange will be limited to 2% of the Fund's net
assets (determined at the time of investment). For purposes of this
limitation, warrants acquired in units or attached to securities are deemed to
be without value.
4. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities
of issuers which are restricted as to disposition, if more than 15% of its
total assets would be invested in such securities. This restriction shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
5. Invest in securities of unseasoned issuers, including their predecessors,
which have been in operation for less than three years, and equity securities
of issuers which are not readily marketable, if more than 5% of its total
assets would be invested in such securities.
6. Invest more than 10% of its total assets in securities of real estate
investment trusts.
7. Invest in shares of registered open-end investment companies unless it
waives any duplicate management and advisory fees.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the 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 the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION WITH PRINCIPAL OCCUPATIONS
AGE FUND DURING PAST 5 YEARS
- ----------------- -------------- ---------------------
<S> <C> <C>
Thomas R. Director Retired. Until July 1991, Chairman, President and Chief
Anderson (58) c/o Executive Officer of Kemper Financial Companies, Inc.;
Prudential Mutual Executive Vice President and Director of Kemper
Fund Management, Corporation; Chairman and Chief Executive Officer of
Inc. One Seaport Kemper Financial Services, Inc.; and Kemper Investors
Plaza Life Insurance Company. Until 1994, Trustee/Director of
New York, NY Kemper Mutual Funds and Kemper Closed-End Funds. Director
of Hinsdale Financial Corporation, Hinsdale Federal Bank
for Savings, The Real Exchange Corporation and Specialty
Equipment Companies, Inc.
Eugene C. Dorsey Director Retired President, Chief Executive Officer and Trustee of
(69) the Gannett Foundation (now Freedom Forum); former
c/o Prudential Publisher of four Gannett newspapers and Vice President
Mutual Fund of the Gannett Company; past Chairman, Independent
Management, Inc. Sector, Washington D.C. (national coalition of
One Seaport Plaza philanthropic organizations); former Chairman of the
New York, NY American Council for the Arts; Director of the Advisory
Board of Chase Manhattan Bank of Rochester.
*Richard A. Redeker President and President, Chief Executive Officer and Director (since
(52) One Seaport Director October 1993), PMF; Executive Vice President, Director
Plaza and Member of the Operating Committee (since October
New York, NY 1993), Prudential Securities; Director (since October
1993) of Prudential Securities Group, Inc.; Executive
Vice President, The Prudential Investment Corporation
(since July 1994); Director (since January 1994) of
Prudential Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS); formerly
Senior Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-September 1993);
Director and President of The Global Yield Fund, Inc. and
The High Yield Income Fund, Inc.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION WITH PRINCIPAL OCCUPATIONS
AGE FUND DURING PAST 5 YEARS
- ----------------- -------------- ---------------------
<S> <C> <C>
Robin B. Smith (56) Director President (since September 1981) and Chief Executive
382 Channel Drive Officer (since January 1988), Publishers Clearing House;
Port Washington, NY Director of BellSouth Corporation, The Omnicon Group,
Inc., Texaco Inc., Spring Industries Inc., First
Financial Fund, Inc., The High Yield Income Fund, Inc.
and The High Yield Plus Fund, Inc.
Robert F. Gunia Vice President Director (since January 1989), Chief Administrative
(49) Officer (since July 1990) and Executive Vice President,
Treasurer and Chief Financial Officer (since June 1987)
of PMF; Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President,
Treasurer and Comptroller (since March 1991) of PMFD;
Director (since June 1987) of PMFS; Vice President and
Director of The Asia Pacific Fund, Inc. (since May 1989).
S. Jane Rose (50) Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June 1987-
New York, NY December 1990) of PMF; Senior Vice President and Senior
Counsel of Prudential Securities (since July 1992);
formerly Vice President and Associate General Counsel of
Prudential Securities.
Eugene S. Stark Treasurer and First Vice President (since January 1990) of PMF.
(38) Principal
One Seaport Plaza Financial and
New York, NY Accounting
Officer
Ellyn C. Acker (35) Assistant Vice President and Associate General Counsel (since March
One Seaport Plaza Secretary 1995) of PMF; Vice President and Associate General
New York, NY Counsel of Prudential Securities (since March 1995);
prior thereto, associated with the law firm of Fulbright
& Jaworski L.L.P.
Stephen M. Ungerman (42) Assistant First Vice President of PMF (since February 1993); Tax
One Seaport Plaza Treasurer Director of the Money Management Group and the Private
New York, NY Asset Group of The Prudential Insurance Company of
America (since March 1996); prior thereto, Senior Tax
Manager of Price Waterhouse (1981-January 1993).
</TABLE>
- ---------
*"Interested" director, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential Securities or PMF.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," oversee such actions and decide on general
policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the
Manager.
The Fund pays each of its Directors who is not an affiliated person of PMF
or Jennison Associates Capital Corp. (Jennison or the Subadviser) annual
compensation of $7,500, in addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments 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 (the T-bill rate) or, pursuant
to an SEC (Securities and Exchange Commission) exemptive order, at the daily
rate of return of the Fund (the Fund rate). Payment of the interest so accrued
is also deferred and accruals become payable at the option of the Director.
The Fund's obligation to make payments of deferred Directors' fees, together
with interest thereon, is a general obligation of the Fund. Currently, Mr.
Dorsey and Ms. Smith have agreed to defer their fees at the T-bill rate and at
the Fund rate, respectively.
B-13
<PAGE>
The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72.
The Board of Directors has nominated a new slate of Directors for the Fund
which will be submitted to shareholders at a special meeting to be held on or
about October 1996.
The following table sets forth estimated aggregate compensation to be paid
by the Fund to the Directors who are not affiliated with the Manager for the
fiscal year ending September 30, 1996 and the aggregate compensation paid to
such Directors for service on the Boards of other investment companies managed
by Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar
year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
ESTIMATED RETIREMENT ESTIMATED FROM FUND AND
AGGREGATE BENEFITS ACCRUED ANNUAL FUND COMPLEX
COMPENSATION AS PART OF FUND BENEFITS UPON PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
----------------- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Thomas R. Anderson--
Director $7,500 None N/A $ 41,375(6/6)*
Eugene C. Dorsey**--
Director $7,500 None N/A $77,375(10/34)*
Robin B. Smith**--
Director $7,500 None N/A $91,875(10/19)*
</TABLE>
- ---------
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
** Aggregate compensation from the Fund Complex for the year ended December
31, 1995, including accrued interest, amounted to approximately $85,783 and
$100,741 for each of Mr. Dorsey and Ms. Smith, respectively.
As of March 22, 1996, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund and there were
no beneficial owners of more than 5% of any class of shares of the outstanding
common stock of the Fund.
As of March 22, 1996, Prudential Securities was the record holder for other
beneficial owners of 6,248,910 Class A shares (approximately 94% of such
shares outstanding), 13,526,855 Class B shares (approximately 93% of such
shares outstanding) and 1,184,403 Class C shares (approximately 98% of such
shares outstanding). In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to
beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager to all of the other investment companies that, together with the Fund,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. As of September 30, 1995, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $51 billion. According to the Investment Company Institute, as
of September 30, 1995, the Prudential Mutual Funds were the 13th largest
family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS 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 the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities and
other assets. In connection therewith, PMF is obligated to keep certain books
and records of the Fund. PMF also administers the Fund's corporate affairs
and, in connection therewith, furnishes the Fund with office facilities,
together with those ordinary clerical and
B-14
<PAGE>
bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian (the Custodian), and Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's transfer and
dividend disbursing agent. The management services of PMF for the Fund are not
exclusive under the terms of the Management Agreement and PMF is free to, and
does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, 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
PMF will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PMF will be paid by PMF to the Fund. Currently,
the Fund believes that the most restrictive expense limitation of state
securities commissions is 2 1/2% of the Fund's average daily net assets up to
$30 million, 2% of the next $70 million of such assets and 1 1/2% of such
assets in excess of $100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or
the Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the fees payable to the Subadviser pursuant to the Subadvisory Agreement
between PMF and Jennison (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) 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 Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of
stock certificates representing shares of the Fund, (i) the cost of fidelity
and liability insurance, (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the SEC, registering the Fund as a broker or
dealer and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements and
prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
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. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Board of
Directors of the Fund, including all of the Directors who are not parties to
the contract or interested persons of any such party, as defined in the
Investment Company Act, on April 9, 1996, and by the initial shareholder of
the Fund on September 14, 1995.
PMF has entered into the Subadvisory Agreement with Jennison, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that Jennison
will furnish investment advisory services in connection with the management of
the Fund. In connection therewith, Jennison is obligated to keep certain books
and records of the Fund. Under the Subadvisory Agreement, Jennison, subject to
the supervision of PMF, is responsible for managing the assets of the Fund in
accordance with its investment
B-15
<PAGE>
objectives, investment program and policies. Jennison determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement. Under the Subadvisory Agreement, PMF
compensates Jennison for its services at an annual rate of .30 of 1% of the
Fund's average daily net assets up to and including $300 million and .25 of 1%
of the Fund's average daily net assets in excess of $300 million.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party, as defined in the Investment Company
Act, on April 9, 1996, and by the initial shareholder of the Fund on September
14, 1995.
The 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 Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or Jennison upon not more than 60 days', nor less
than 30 days', written notice. The 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.
The Manager and the Subadviser 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, 1994. Its primary business is to offer a full range of products
and services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs
for employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons worldwide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more
than 50 million worldwide--to more than one of every five people in the United
States. 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 has been engaged
in the insurance business since 1875. In July 1995, Institutional Investor
ranked Prudential the third largest institutional money manager of the 300
largest money management organizations in the United States as of December 31,
1994. As of December 31, 1994, Prudential through its subsidiaries provided
automobile insurance for more than 1.8 million cars and insured more than 1.5
million homes. For the year ended December 31, 1994, The Prudential Bank, a
subsidiary of Prudential, served 940,000 customers in 50 states providing
credit card services and loans totaling more than $1.2 billion. Assets held by
PSI for its clients totaled approximately $150 billion at December 31, 1994.
During 1994, over 28,000 new customer accounts were opened each month at PSI.
The Prudential Real Estate Affiliates, the fourth largest real estate
brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.
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 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the Class
A, Class B and Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (also the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B
and Class C shares. See "How the Fund Managed--Distributor" in the Prospectus.
On April 9, 1996, the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A, Class B or Class
C Plan or in any agreement related to the Plans (the Rule 12b-1 Directors), at
a meeting called for the purpose of voting on each Plan, approved the
continuance of the Plans and Distribution Agreement. The Class A Plan provides
that (i) .25 of 1% of the average daily net assets of the Class A shares may
be used to pay for personal service and the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1%. The Class B and Class C Plans
provide that (i) .25 of 1% of the average daily net assets of the Class B and
Class C shares, respectively, may be paid as a service fee and (ii) .75 of 1%
(not including
B-16
<PAGE>
the service fee) may be paid for distribution-related expenses with respect to
the Class B and Class C shares, respectively (asset-based sales charge). The
Plans were each approved by the sole shareholder of the Class A, Class B and
Class C shares on September 14, 1995.
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on
such continuance. The Plans may each be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote
of the holders of a majority of the outstanding shares of the applicable class
on not more than 60 days', nor less than 30 days' written notice to any other
party to the Plans. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class, and all material amendments are required
to be approved by the Board of Directors in the manner described above. Each
Plan will automatically terminate in the event of its assignment. The Fund
will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the
selection and nomination of Rule 12b-1 Directors shall be committed to the
Rule 12b-1 Directors.
Prudential Securities serves as the Distributor of Class Z shares and incurs
the expenses of distributing the Fund's Class Z shares under a Distribution
Agreement with the Fund, none of which are reimbursed by or paid for by the
Fund.
Pursuant to the Distribution Agreements, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order
issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI
to cease and desist from violating the federal securities laws and imposed a
$10 million civil penalty; and (iii) required PSI to adopt certain remedial
measures including the establishment of a Compliance Committee of its Board of
Directors. Pursuant to the terms of the SEC settlement, PSI established a
settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has
agreed to provide additional funds, if necessary, for that purpose. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action. In settling the
above referenced matters, PSI neither admitted nor denied the allegations
asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December
31, 1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend solicitation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Texas office to new customers during a period of twenty
consecutive business days, and agreed that its other Texas offices would be
subject to the same restrictions for a period of five consecutive business
days. PSI also agreed to institute training programs for its securities
salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States
Postal Inspection Service. PSI further agreed to obtain a mutually acceptable
outside director to sit on the Board of
B-17
<PAGE>
Directors of PSG and the Compliance Committee of PSI. The new director will
also serve as an independent "ombudsman" whom PSI employees can call
anonymously with complaints about ethics and compliance. Prudential Securities
shall report any allegations or instances of criminal conduct and material
improprieties to the new director. The new director will submit compliance
reports which shall identify all such allegations or instances of criminal
conduct and material improprieties every three months for a three-year period.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. In the case of
Class B shares, interest charges equal to the prime rate plus one percent per
annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not required to be included in the calculation
of the 6.25% limitation. The annual asset-based sales charge with respect to
Class B and Class C shares of the Fund may not exceed .75 of 1%. The 6.25%
limitation applies to the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any
class, all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the Subadviser. Broker-dealers may receive negotiated
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
On foreign securities exchanges, commissions may be fixed. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting
as principal for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal, except in accordance with rules
of the SEC. Thus, it will not deal with Prudential Securities acting as market
maker, and it will not execute a negotiated trade with Prudential Securities
if execution involves Prudential Securities' acting as principal with respect
to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund's, and the
services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. The Manager's policy is to pay higher commissions to brokers, other
than Prudential Securities, for particular transactions than might be charged
if a different broker had been selected, on occasions when, in the Manager's
opinion, this policy furthers the objective of obtaining best price and
execution. In addition, the Manager is authorized to pay higher commissions on
brokerage transactions for the Fund to brokers other
B-18
<PAGE>
than Prudential Securities (or any affiliate) in order to secure research and
investment services described above, subject to review by the Fund's Board of
Directors from time to time as to the extent and continuation of this
practice. The allocation or orders among brokers and the commission rates paid
are reviewed periodically by the Fund's Board of Directors. The Fund will not
pay up for research in principal transactions.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for
the Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities (or any affiliate) must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers or futures commission merchants in connection with
comparable transactions involving similar securities or futures being
purchased or sold on an exchange during a comparable period of time. This
standard would allow Prudential Securities (or any affiliate) to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the Directors who are not "interested" persons, has adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) of
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed by
applicable law.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares of the
Fund are not subject to any sales or redemption charge and are offered
exclusively for sale to participants in the Prudential Securities 401(k) Plan,
an employee benefit plan sponsored by Prudential Securities (the PSI 401(k)
Plan). See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service expenses, which may affect
performance, (ii) each class has exclusive voting rights on any other matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class,
(iii) each class has a different exchange privilege, (iv) only Class B shares
have a conversion feature and (v) Class Z shares are offered exclusively for
sale to participants in the PSI 401(k) Plan. See "Distributor." Each class
also has separate exchange privileges. See "Shareholder Investment Account--
Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5%, Class
B*, Class C* and Class Z** shares are sold at net asset value. Using the
Fund's net asset value at March 31, 1996, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Net asset value and redemption price per Class A share............ $10.39
Maximum sales charge (5% of offering price)....................... .55
------
Offering price to public.......................................... $10.94
======
CLASS B
Net asset value, redemption price and offering price per Class B
share*........................................................... $10.36
======
CLASS C
Net asset value, redemption price and offering price per Class C
share*........................................................... $10.36
======
CLASS Z
Net asset value, offering price and redemption price per Class Z
share**.......................................................... $10.39
======
</TABLE>
- ---------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
** Class Z shares were not offered prior to April 15, 1996.
B-19
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take
advantage of the reduced sales charges applicable to larger purchases. See the
table of breakpoints under "Shareholder Guide-- Alternative Purchase Plan" in
the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. The value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering or price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values Its Shares" in the Prospectus. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of Accumulation are not available to individual
participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. All shares of the Fund and shares of other Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) which were previously purchased and are still owned are
also included in determining the applicable reduction. However, the value of
shares held directly with the Transfer Agent and through Prudential Securities
will not be aggregated to determine the reduced sales charge. All shares must
be held either directly with the Transfer Agent or through Prudential
Securities. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Letters of
Intent are not available to individual participants in any retirement or group
plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount
B-20
<PAGE>
represented by the goal, as if it were a single investment, except in the case
of retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser. The effective date of a Letter of
Intent may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to
the fulfillment of the Letter of Intent goal, except in the case of retirement
and group plans.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser (or the employer
or plan sponsor in the case of any retirement or group plan) is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such
difference. Investors electing to purchase Class A shares of the Fund pursuant
to a Letter of Intent should carefully read such Letter of Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is unable Administration award letter or a letter
to engage in any substantial gainful from a physician on the physician's
activity by reason of any medically letterhead stating that the shareholder
determinable physical or mental impairment (or, in the case of a trust, the grantor)
which can be expected to result in death or is permanently disabled. The letter must
to be of long-continued and indefinite also indicate the date of disability.
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA)
or the plan administrator/trustee on
company letterhead indicating the amount of
the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
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 stock 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. The 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 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.
B-21
<PAGE>
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly
to the dealer. Any shareholder who receives a cash payment representing a
dividend or distribution may reinvest such dividend or distribution at net
asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds
by the Transfer Agent. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the
Exchange Privilege. The Fund makes available to its shareholders the privilege
of exchanging their shares of the 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 the Fund.
All exchanges are made on the basis of relative net asset value next
determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold
under applicable state laws. For retirement and group plans having a limited
menu of Prudential Mutual Funds, the Exchange Privilege is available for those
funds eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by
the fund in which shares were initially purchased and the purchase date will
be deemed to be the date of the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption
from such money market fund or after re-exchange into the Fund, such shares
will be subject to the CDSC calculated without regard to the time such shares
were held in the money market fund. In order to minimize the period of time in
which shares are subject to a CDSC, shares exchanged out of the money market
fund will be exchanged on the basis of their remaining holding periods, with
the longest remaining holding periods being transferred first. In measuring
the time period shares are held in a money market fund and "tolled" for
purposes of calculating the CDSC holding period, exchanges are deemed to have
been made on the last day of the month. Thus, if shares are
B-22
<PAGE>
exchanged into the Fund from a money market fund during the month (and are
held in the Fund at the end of the month), the entire month will be included
in the CDSC holding period. Conversely, if shares are exchanged into a money
market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any
CDSC. Shares of any fund participating in the Class B or Class C exchange
privilege that were acquired through reinvestment of dividends or
distributions may be exchanged for Class B or Class C shares of other funds,
respectively, without being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec.
CLASS Z. Class Z shares may be exchanged for Class Z shares of the funds
listed below which participate in the PSI 401(k) Plan. No fee or sales load
will be imposed upon the exchange.
Prudential Allocation Fund (Balanced Portfolio)
Prudential Equity Income Fund
Prudential Equity Fund, Inc.
Prudential Global Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust (Money Market Series)
Prudential High Yield Fund, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Utility Fund, Inc.
For additional details about the Exchange Privilege Class Z shareholders
should contact the Prudential Securities Benefit Department at One Seaport
Plaza, 33rd Floor, New York, New York 10292.
The Exchange Privilege may be modified, terminated or suspended on 60 days'
notice, and any fund, including the 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/
- ---------
/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.
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>
PERIOD OF
MONTHLY
INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------
/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 the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
See "Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of the Fund
monthly by authorizing his or her bank account or Prudential Securities
Account (including a Command Account) to be debited to invest specified dollar
amounts in shares of the Fund. The investor's bank must be a member of the
Automatic Clearing House System. Stock certificates are not issued to ASAP
participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares
are inadvisable because of the sales charges applicable to (i) the purchase of
Class A shares and (ii) the withdrawal of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code of 1986, as
amended (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 an other
details are available from Prudential Securities 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/
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
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
</TABLE>
- ---------
/1/ The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a portfolio of the Fund, if applicable) 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 promoted
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. The 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 the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their
Prudential Securities Financial Advisor or Prudential/Pruco Securities
Representative concerning the appropriate blend of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
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, the 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 on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. 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 last reported bid and asked prices provided by principal market
makers or independent pricing agents. Options on stock and stock indices
traded on an exchange are valued at the mean between the most recently quoted
bid and asked prices on the respective exchange and futures contracts and
options thereon are valued at their last sales prices as of the close of the
commodities exchange or board of trade. Should an extraordinary event, which
is likely to affect the value of the security, occur after the close of an
exchange
B-25
<PAGE>
on which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the
Fund's Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with
interest accrued or discount amortized to the date of maturity, if their
original maturity was 60 days or less, unless this is determined by the Board
of Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem Fund shares have been received or days on which changes in the
value of the Fund's portfolio securities do not affect net asset value. In the
event the New York Stock Exchange closes early on any business day, the net
asset value of the Fund's shares shall be determined at a time between such
closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. It is expected, however, that the net
asset value per share of each class will tend to converge immediately after
the recording of dividends which will differ by approximately the amount of
the distribution expense accrual differential among the classes.
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income which is distributed to shareholders and permits net long-term
capital gains of the Fund (i.e., the excess of net long-term capital gains
over net short-term capital losses) to be treated as long-term capital gains
of the shareholders, regardless of how long shareholders have held their
shares in the Fund.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans,
and gains from the sale or other disposition of securities or options thereon
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; (b) the Fund derive
less than 30% of its gross income from gains (without reduction for losses)
from the sale or other disposition of securities, options thereon, futures
contracts, options thereon, forward contracts and foreign currencies held for
less than three months (except for foreign currencies directly related to the
Fund's business of investing in foreign securities) (the short-short rule);
(c) the Fund diversify its holdings so that, at the end of each quarter of the
taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities and other securities limited
in respect of any one issuer to an amount not greater than 5% of the market
value of the Fund's assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities);
and (d) the Fund distribute to its shareholders at least 90% of its net
investment income (including short-term capital gains) other than long-term
capital gains in each year.
Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year except in certain cases where the Fund acquires a put or writes
a call thereon or makes a short sale against-the-box. Other gains or losses on
the sale of securities will be short-term capital gains or losses. Gains and
losses on the sale, lapse or other termination of options on securities will
generally be treated as gains and losses from the sale of securities (assuming
they do not qualify as Section 1256 contracts). If an option written by the
Fund on securities lapses or is terminated through a closing transaction, such
as a repurchase by the Fund of the option from its holder, the Fund will
generally realize short-term capital gain or loss. If securities are sold by
the Fund pursuant to the exercise of a call option written by it, the Fund
will include the premium received in the sale proceeds of the securities
delivered in determining the amount of gain or loss on the sale. Certain of
the Fund's transactions may be subject to wash sale, short sale, conversion
transaction and straddle provisions of the Internal Revenue Code. In addition,
debt securities acquired by the Fund may be subject to original issue discount
and market discount rules.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. See "Investment Objective and Policies." These investments
will generally constitute Section 1256 contracts and will be required to be
"marked to market" for federal income tax purposes at the end of the Fund's
taxable year; that is, treated as having been sold at market value. Except
with respect to forward foreign currency exchange contracts, 60% of any gain
or loss recognized on such deemed sales and on actual dispositions will be
treated as long-term capital gain or loss, and the remainder will be treated
as short-term capital gain or loss.
B-26
<PAGE>
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be long-
term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain
wash sale and short sale provisions of the Internal Revenue Code. In the case
of a straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund. The conversion transaction rules may apply to
certain transactions to treat all or a portion of the gain thereon as ordinary
income rather than as capital gain.
The Fund's ability to hold foreign currencies or engage in hedging
activities may be limited by the 30% short-short rule discussed above.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will
be subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. Proposed Treasury regulations
provide that the Fund may make a "mark-to-market" election with respect to any
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.
Alternatively, the Fund may elect to treat any PFIC in which it invests as a
"qualified electing fund," in which case, in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the qualified electing fund's annual ordinary earnings
and net capital gain, even if they are not distributed to the Fund; those
amounts would be subject to the distribution requirements applicable to the
Fund described above. It may be very difficult, if not impossible, to make
this election because of certain requirements thereof.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
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 are treated as ordinary income or
ordinary loss. Similarly, gains or losses on forward foreign currency exchange
contracts or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also are
treated as ordinary gain or loss. These gains, referred to under the Internal
Revenue Code as "Section 988" gains or losses, increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, or distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her Fund shares.
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during
the 12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from
the prior year or the twelve-month period ending on October 31 of such prior
year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Fund pays income tax is treated as distributed.
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share net asset value of the investor's shares by
the per share amount of the dividends. Furthermore, such dividends, although
in effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including capital gains distributions, which are
expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the 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.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
B-27
<PAGE>
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder are generally not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax on any dividends
and capital gain distributions which are effectively connected with a U.S.
trade or business of the foreign shareholder.
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. Interest
income, capital gain net income, gain or loss from Section 1256 contracts
(described above), dividend income from foreign corporations and income from
other sources will not constitute qualified dividends. Individual shareholders
are not eligible for the dividends-received deduction.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. The Fund does not
expect to meet the requirements of the Internal Revenue Code for "passing-
through" to its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
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 of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
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 period from November 2, 1995
(commencement of investment operations) to March 31, 1996 for the Fund's Class
A, Class B and Class C shares was (1.29)%, (1.40)% and 2.60%, respectively.
Class Z shares were not offered prior to April 15, 1996.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
P
B-28
<PAGE>
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges. The aggregate total return for the period
from November 2, 1995 (commencement of investment operations) to March 31,
1996 for the Fund's Class A, Class B and Class C shares was 3.90%, 3.60% and
3.60%, respectively. Class Z shares were not offered prior to April 15, 1996.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of
inflation./1/
[CHART]
- ---------
/1/ Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1995
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. 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.
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 Fund's portfolio securities
and cash and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the 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, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account of $9.50, a new account set-up fee for each manually
established account of $2.00 and a monthly inactive zero balance account fee
per shareholder account of $.20. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing,
allocable communication expenses and other costs.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants, and in that capacity audits the
Fund's annual reports.
B-29
<PAGE>
I N D E P E N D E N T A U D I T O R S ' R E P O R T
The Shareholder and Board of Directors of
Prudential Jennison Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Jennison Fund, Inc. as of September 13, 1995. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the financial position of Prudential Jennison
Fund, Inc. as of September 13, 1995, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
New York, New York
September 14, 1995
B-30
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
September 13,
Assets 1995
-------------
Cash ............................................................. $100,000
Deferred organization costs (Note 1) ............................. 250,000
--------
Total assets ............................................. 350,000
--------
Liabilities
Deferred organization costs payable (Note 1)...................... 250,000
--------
Net Assets (Note 1)
Applicable to 10,000 shares of common stock .................. $100,000
========
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share ....... $10.00
Maximum sales charge (5.0% of offering price) ................ .53
------
Offering price to public ..................................... $10.53
======
Class B:
Net asset value, offering price and redemption price per
Class B share ............................................... $10.00
======
Class C:
Net asset value, offering price and redemption price per
Class C share ............................................... $10.00
======
See Notes to Financial Statement.
B-31
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
Notes to Financial Statement
- --------------------------------------------------------------------------------
Note 1. Prudential Jennison Fund, Inc. ("the Fund"), which was incorporated in
Maryland on August 10, 1995, is an open-end, diversified management investment
company. The Fund has had no significant operations other than the issuance of
3,334 shares of Class A and 3,333 shares of each Class B and Class C common
stock for $100,000 on September 13, 1995 to Prudential Mutual Fund Management,
Inc. (PMF). There are 2.5 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, 500 million and 500
million authorized shares, respectively.
Costs incurred and expected to be incurred in connection with the
organization and initial registration of the Fund will be paid initially by PMF
and will be repaid to PMF upon commencement of investment operations. These
costs will be deferred and amortized over the period of benefit not to exceed
60 months from the date the Fund commences investment operations. If any of the
initial shares of the Fund are redeemed by any holder thereof during the period
of amortization of organization expenses, the redemption proceeds will be
reduced by the pro-rata amount of unamortized organization expenses based on
the number of initial shares being redeemed to the number of the initial shares
outstanding.
Note 2. Agreements
The Fund has entered into a management agreement with PMF. PMF is an
indirect wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
The management fee paid PMF will be computed daily and payable monthly,
at an annual rate of .60 of 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and Jennison Associates
Capital Corp. (Jennison), a wholly-owned subsidiary of Prudential, Jennison
furnishes investment advisory services in connection with the management of the
Fund. Under the Subadvisory Agreement, Jennison, subject to the supervision of
PMF, is responsible for managing the assets of the Fund in accordance with its
investment objectives, investment program and policies. Jennison determines
what secunties and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
PMF pays Jennison a subadvisory fee at an annual rate of .30 of 1% of the
average daily net assets of the Fund up to and including $300 million and .25
of 1% of such assets in excess of $300 million. PMF also pays the cost of
compensation of officers and employees of the Fund, occupancy and certain
clerical and accounting costs of the Fund. The Fund bears all other costs and
expenses.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for
expenses (including the fees of PMF but excluding interest, taxes, brokerage
commissions, distribution fees, litigation and indemnification expenses and
other extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions. The most restrictive
expense limitation is presently believed to be 2 1/2% of the Fund's average
daily net assets up to $30 million, 2% of the next $70 million of such assets
and 1 1/2% of such assets in excess of $100 million. Such expense
reimbursement, if any, will be estimated and accrued daily and payable monthly.
The Fund has entered into a distribution agreement with Prudential
Securities Incorporated (PSI) for distribution of the Fund's shares.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class
B Plan and the Class C Plan, collectively the "Plans") adopted by the Fund under
Rule 12b-1 of the Investment Company Act of 1940, PSI (also the "Distributor")
incurs the expenses of distributing the Fund's Class A, Class B and Class C
shares. These expenses include commissions and account servicing fees paid to,
or on account of financial advisers of PSI and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions paid to, or on account of,
other broker-dealers or certain 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
PSI and Prusec associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
Pursuant to the Class A Plan, the Fund will compensate PSI for its
expenses with respect to Class A shares at an annual rate of up to .30 of 1% of
the average daily net asset value of the Class A shares. PSI has agreed to limit
its distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net asset value of the Class A shares for the fiscal year ending
September 30, 1996.
Pursuant to the Class B and Class C Plans, the Fund compensates PSI for
its distribution-related expenses with respect to the Class B and C shares at an
annual rate of 1% of the average daily net assets of the Class B and C shares.
B-32
<PAGE>
Portfolio of Investments as of March 31, 1996
(Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
- ----------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--96.9%
COMMON STOCKS--96.9%
- ----------------------------------------------------------------
Aerospace/Defense--3.4%
94,500 Boeing Co. $ 8,186,063
- ---------------------------------------------------------------
Airlines--1.8%
56,000 Delta Airlines, Inc. 4,305,000
- ---------------------------------------------------------------
Beverages--3.3%
35,100 Coca-Cola Co. 2,900,137
80,000 PepsiCo Inc. 5,060,000
------------
7,960,137
- ---------------------------------------------------------------
Biotechnology--1.1%
27,900 Chiron Corp. (a) 2,741,175
- ---------------------------------------------------------------
Business Services--7.9%
100,000 CUC International Inc. (a) 2,925,000
94,200 Eagle River Interactive, Inc. (a) 1,224,600
59,600 First Data Corp. 4,201,800
112,800 Omnicom Group, Inc. 5,076,000
86,000 Reuters Holdings PLC (ADR)
(United Kingdom) 5,600,750
------------
19,028,150
- ---------------------------------------------------------------
Cellular Communications--1.3%
85,300 Vodafone Group PLC (ADR)
(United Kingdom) 3,198,750
- ---------------------------------------------------------------
Computer Systems/Peripherals--4.9%
168,800 EMC Corp. (a) 3,692,500
59,300 Hewlett-Packard Co. 5,574,200
48,000 Seagate Technology, Inc. (a) 2,628,000
------------
11,894,700
- ---------------------------------------------------------------
EDP Software & Services--12.3%
72,000 America Online Inc. 4,032,000
85,600 AutoDesk, Inc. 3,231,400
75,600 Computer Associates International,
Inc. 5,414,850
62,000 General Motors Corp., Class E $ 3,534,000
48,700 Intuit Inc. 2,191,500
82,200 Macromedia Inc. (a) 3,514,050
47,000 Microsoft Corp. (a) 4,846,875
61,800 SAP AG (ADR) (Germany) 2,950,950
------------
29,715,625
- ---------------------------------------------------------------
Financial Companies--2.0%
148,300 Federal National Mortgage Assn. 4,727,062
- ---------------------------------------------------------------
Health Care Services--5.1%
96,000 Healthsouth Corp. (a) 3,264,000
78,400 PhyCor, Inc. (a) 3,449,600
92,600 United Healthcare Corp. 5,694,900
------------
12,408,500
- ---------------------------------------------------------------
Household & Personal Care Products--1.9%
28,900 Duracell International, Inc. 1,434,163
61,900 Gillette Co. 3,203,325
------------
4,637,488
<CAPTION>
Shares Description Value (Note 1)
- ---------------------------------------------------------------
<C> <S> <C>
Hotels--2.4%
20,500 Hilton Hotels Corp. 1,927,000
63,300 ITT Corp. 3,798,000
------------
5,725,000
- ---------------------------------------------------------------
Industrial Tech/Instruments--1.2%
81,900 Symbol Technologies, Inc. (a) 2,876,738
- ---------------------------------------------------------------
Insurance--4.3%
28,800 CIGNA Corp. 3,290,400
49,700 ITT Hartford Group, Inc. 2,435,300
83,400 MGIC Investment Corp. 4,545,300
------------
10,271,000
- ---------------------------------------------------------------
Machinery--1.1%
66,400 Harnischfeger Industries, Inc. 2,573,000
</TABLE>
B-33
<PAGE>
Portfolio of Investments as of March 31, 1996
(Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
- ----------------------------------------------------------------
<C> <S> <C>
Media--4.4%
115,400 Disney (Walt) Co. $ 7,371,175
73,300 Infinity Broadcasting Corp., Class A
(a) 3,179,387
------------
10,550,562
- ---------------------------------------------------------------
Networking--3.9%
128,900 Cisco Systems, Inc. (a) 5,977,737
86,500 3Com Corp. (a) 3,449,187
------------
9,426,924
- ---------------------------------------------------------------
Oil Services--1.0%
31,500 Schlumberger, Ltd. 2,492,438
- ---------------------------------------------------------------
Pharmaceuticals--11.6%
124,800 Astra AB Class A (ADR) (Sweden) 5,787,600
51,900 Ciba-Geigy AG (ADR) (Switzerland) 3,230,775
47,700 Johnson & Johnson Co. 4,400,325
76,000 Lilly (Eli) & Co. 4,940,000
76,900 Pfizer Inc. 5,152,300
83,900 Smith Kline Beecham PLC (ADR)
(United Kingdom) 4,320,850
------------
27,831,850
- ---------------------------------------------------------------
Publishing--1.3%
44,700 Scholastic Corp. (a) 3,073,125
- ---------------------------------------------------------------
Retail--10.3%
139,900 AutoZone, Inc. (a) 4,739,112
90,000 Corporate Express, Inc.(a) 2,970,000
138,500 General Nutrition Companies, Inc.
(a) 3,462,500
115,400 Gymboree Corp. (a) 3,014,825
70,300 Home Depot, Inc. 3,365,613
50,200 Kohl's Corp. (a) 3,181,425
55,800 Micro Warehouse, Inc. (a) 2,315,700
22,200 NIKE, Inc. 1,803,750
------------
24,852,925
- ---------------------------------------------------------------
Semiconductors & Related Devices--5.4%
82,500 Intel Corp. $ 4,692,187
135,500 International Rectifier Corp. (a) 2,439,000
105,300 KLA Instruments Corp. (a) 2,382,413
135,600 LSI Logic Corp. 3,627,300
------------
13,140,900
- ---------------------------------------------------------------
Telecommunications Equipment--3.2%
110,200 Ericsson (L.M.) Telephone Co. (ADR)
(Sweden) 2,355,525
47,000 Nokia AB (ADR) (Finland) 1,609,750
76,600 Tellabs, Inc. (a) 3,705,525
------------
7,670,800
- ---------------------------------------------------------------
Telephones--1.8%
141,900 MCI Communications Corp. 4,292,475
- ---------------------------------------------------------------
Total long-term investments
(cost $220,038,850) 233,580,387
------------
<CAPTION>
Principal
Moody's Amount
Rating (000)
- -------- ---------
SHORT-TERM INVESTMENT--2.8%
- ----------------------------------------------------------------
<C> <C> <S> <C>
Corporate Notes--2.8%
P1 $ 6,684 Ford Motor Credit Corp.
5.38%, 4/1/96
(cost $6,684,000) 6,684,000
- ----------------------------------------------------------------
Total Investments--99.7%
(cost $226,722,850; Note
4) $240,264,387
Other assets in excess
of liabilities--0.3% 644,936
------------
Net Assets--100% $240,909,323
============
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
B-34
<PAGE>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets March 31, 1996
Investments, at value (cost $226,722,850).................................................................. $240,264,387
Cash....................................................................................................... 44,293
Receivable for Fund shares sold............................................................................ 3,613,745
Receivable for investments sold............................................................................ 1,360,851
Dividends and interest receivable.......................................................................... 208,417
Deferred expenses and other assets......................................................................... 230,130
--------------
Total assets............................................................................................ 245,721,823
--------------
Liabilities
Payable for investments purchased.......................................................................... 3,428,870
Payable for Fund shares reacquired......................................................................... 902,502
Accrued expenses and other liabilities..................................................................... 211,144
Distribution fees payable.................................................................................. 152,124
Management fee payable..................................................................................... 117,860
--------------
Total liabilities....................................................................................... 4,812,500
--------------
Net Assets................................................................................................. $240,909,323
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 23,243
Paid-in capital in excess of par........................................................................ 233,402,585
--------------
233,425,828
Accumulated net investment loss......................................................................... (469,661)
Accumulated net realized loss on investments............................................................ (5,588,381)
Net unrealized appreciation on investments.............................................................. 13,541,537
--------------
Net assets, March 31, 1996................................................................................. $240,909,323
--------------
--------------
Class A:
Net asset value and redemption price per share
($71,302,592 / 6,863,673 shares of common stock issued and outstanding).............................. $10.39
Maximum sales charge (5.0% of offering price)........................................................... .55
--------------
Maximum offering price to public........................................................................ $10.94
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($156,909,428 / 15,152,747 shares of common stock issued and outstanding)............................ $10.36
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($12,697,303 / 1,226,160 shares of common stock issued and outstanding).............................. $10.36
--------------
--------------
</TABLE>
B-35
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
November 2, 1995(a)
Through
Net Investment Income March 31, 1996
<S> <C>
Income
Dividends............................ $ 578,402
Interest............................. 283,597
---------------
Total income...................... 861,999
---------------
Expenses
Distribution fee--Class A............ 62,056
Distribution fee--Class B............ 495,519
Distribution fee--Class C............ 43,189
Management fee....................... 472,159
Transfer agent's fees and expenses... 64,000
Registration fees.................... 63,000
Custodian's fees and expenses........ 38,000
Reports to shareholders.............. 36,000
Amortization of deferred organization
expense........................... 20,663
Audit fee and expenses............... 12,500
Directors' fees...................... 11,250
Legal fees and expenses.............. 9,000
Miscellaneous........................ 4,324
---------------
Total expenses.................... 1,331,660
---------------
Net investment loss..................... (469,661)
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investment
transactions......................... (5,588,381)
Net unrealized appreciation of
investments.......................... 13,541,537
---------------
Net gain on investments................. 7,953,156
---------------
Net Increase in Net Assets Resulting
from Operations......................... $ 7,483,495
===============
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL JENNISON FUND, INC.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
November 2, 1995(a)
Increase (Decrease) Through
in Net Assets March 31, 1996
<S> <C>
Operations
Net investment loss.................. $ (469,661)
Net realized loss on investments..... (5,588,381)
Net unrealized appreciation on
investments....................... 13,541,537
----------------
Net increase in net assets resulting
from operations................... 7,483,495
----------------
Fund share transactions (Note 5)
Net proceeds from shares sold........ 270,604,646
Cost of shares reacquired............ (37,278,818)
----------------
Net increase in net assets from Fund
share transactions................ 233,325,828
----------------
Total increase.......................... 240,809,323
Net Assets
Beginning of period..................... 100,000
----------------
End of period........................... $ 240,909,323
================
</TABLE>
- ---------------
(a) Commencement of investment operations.
B-36
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
Prudential Jennison Fund, Inc (the ``Fund''), which was incorporated in Maryland
on August 10, 1995, is registered under the Investment Company Act of 1940, as a
diversified, open-end management investment company. The Fund had no significant
operations other than the issuance of 3,334 shares of Class A and 3,333 shares
of each Class B and Class C common stock for $100,000 on September 13, 1995 to
Prudential Mutual Fund Management, Inc. (``PMF''). Investment operations
commenced on November 2, 1995.
The Fund's investment objective is to achieve long-term growth of capital by
investing primarily in equity securities (common stock, preferred stock and
securities convertible into common stock) of established companies with
above-average growth prospects.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. Security Valuation:
Securities listed on a securities exchange (other than options on securities and
indices) are valued at the last sales price on the day of valuation, or, if
there was no sale on such day, at the average of readily available closing bid
and asked prices on such day as provided by a pricing service. 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 average of
the most recently quoted bid and asked prices provided by a principle market
maker or dealer. Options on securities and indices traded on an exchange are
valued at the average of the most recently quoted bid and asked prices provided
by the respective exchange and futures contracts and options thereon are valued
at the last sales price as of the last sales price as of the close of business
of the exchange. Securities for which market quotations are not readily
available are valued at fair value as 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.
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 or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; 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 (loss), other than distribution fees, and
realized and unrealized 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.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income, if any, semi-annually and to make distributions of any net capital gains
at least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Deferred Organization Expenses: Approximately $250,000 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 entered into a management agreement with PMF. PMF is an indirect
wholly-owned subsidiary of The Prudential Insurance Company of America
(``Prudential'').
The management fee paid PMF will be computed daily and payable monthly, at an
annual rate of .60 of 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and Jennison Associates Capital
Corp. (``Jennison''), a wholly-owned subsidiary of Prudential, Jennison
furnishes investment advisory services in connection with the management of the
Fund. Under the Subadvisory Agreement, Jennison, subject to the supervision of
PMF, is responsible for managing the assets of the Fund in accordance with its
investment objectives, investment program and policies. Jennison determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
PMF pays Jennison a subadvisory fee at an annual rate of.30 of 1% of the average
daily net assets of the Fund up to and including $300 million and .25 of 1% of
such assets in excess of $300 million. PMF also pays the cost of compensation of
officers and employees of the Fund, occupancy and certain clerical and
accounting costs of the Fund. The Fund bears all other costs and expenses.
The Fund has a distribution agreement with Prudential Securities Incorporated
(``PSI''), which acts as the distributor of the Class A, Class B and Class C
shares, pursuant to plans of distribution, (the ``Class A, B and C
B-37
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
Plans'') regardless of expenses actually incurred by them. The distribution fees
are accrued daily and payable monthly.
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.
With respect to the Class A Plan, PSI has agreed to limit its
distribution-related costs to .25 of 1% of average daily net assets for the
fiscal year ending September 30, 1996. With respect to the Class B and Class C
Plans, the Fund compensates PSI for its distribution-related fees at an annual
rate of 1% of the average daily net assets.
PSI has advised the Fund that it has received approximately $2,500,000 in
front-end sales charges resulting from sales of Class A shares during the period
ended March 31, 1996. From these fees, PSI paid such sales charges to Pruco
Securities Corporation and affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the period ended March 31,1996, it received
approximately $20,000 and $1,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders, respectively.
PSI is a wholly-owned subsidiary of Prudential.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended March 31,
1996, the Fund incurred fees of approximately $60,000 for the services of PMFS.
As of March 31, 1996, approximately $26,000 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 March 31, 1996 were $262,386,656 and $36,759,424,
respectively.
The federal income tax cost basis of the Fund's investments at March 31, 1996,
was $227,397,851 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $12,866,536 (gross unrealized
appreciation-$23,022,844; gross unrealized depreciation--$10,156,308).
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. The Fund will commence
offering Class Z shares on April 15, 1996. 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 contigent 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.
There are 2.5 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, 500 million and 500 million authorized
shares, respectively.
Transactions in shares of common stock for the period November 2, 1995
(commencement of operations) through March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Shares sold......................... 9,776,881 $ 98,801,764
Shares reacquired................... (2,916,542) (30,029,290)
---------- ------------
Net increase in shares
outstanding....................... 6,860,339 $ 68,772,474
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Shares sold......................... 15,791,915 $158,817,765
Shares reacquired................... (642,501) (6,531,020)
---------- ------------
Net increase in shares
outstanding....................... 15,149,414 $152,286,745
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Shares sold......................... 1,293,658 $ 12,985,117
Shares reacquired................... (70,831) (718,508)
---------- ------------
Net increase in shares
outstanding....................... 1,222,827 $ 12,266,609
---------- ------------
---------- ------------
</TABLE>
B-38
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
<S> <C> <C> <C>
November 2, November 2, November 2,
1995(a) 1995(a) 1995(a)
Through Through Through
March 31, March 31, March 31,
1996 1996 1996
----------- ----------- -----------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................................................. $ 10.00 $ 10.00 $ 10.00
----------- ----------- -----------
Income from investment operations
Net investment loss.................................................................. -- (.03) (.03)
Net realized and unrealized gain on investment transactions.......................... .39 .39 .39
----------- ----------- -----------
Total from investment operations.................................................. .39 .36 .36
----------- ----------- -----------
Net asset value, end of period....................................................... $ 10.39 $ 10.36 $ 10.36
----------- ----------- -----------
----------- ----------- -----------
TOTAL RETURN(c)...................................................................... 3.90% 3.60% 3.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)...................................................... $71,303 $ 156,909 $12,697
Average net assets (000)............................................................. $60,165 $ 120,106 $10,468
Ratios to average net assets(b):
Expenses, including distribution fees............................................. 1.18% 1.93% 1.93%
Expenses, excluding distribution fees............................................. .93% .93% .93%
Net investment loss............................................................... (.09)% (.84)% (.84)%
Portfolio turnover rate.............................................................. 19% 19% 19%
Average commission rate paid per share............................................... $ .0595 $ .0595 $ .0595
</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.
B-39
<PAGE>
APPENDIX -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY (VALUE OF $1 INVESTED ON
12/31/25)
[CHART]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any portfolio.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile
than bond prices over the long-term.
Small stock returns for 1926-1989 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 represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each
year a new bond with a then-current coupon replaces the old bond. 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).
Impact of Inflation. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is
to outpace the erosive impact of inflation on investment returns.
A-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 1995. 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 Fund or of
any sector in which the Fund invests.
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 the 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.
Historical Total Returns of Different Bond Market Sectors
[CHART]
/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.
A-2
<PAGE>
This chart illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment made
markets for the period from 1986 in the stocks representing the S&P
through 1995. It does not represent 500 stock index with and without
the performance of any Prudential reinvested dividends.
Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF
MAJOR WORLD STOCK MARKETS (1986-
1995) (IN U.S. DOLLARS)
[CHART]
[CHART]
Source: Stocks, Bonds, Bills, and
Inflation 1995 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 in 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.
Source: Morgan Stanley Capital
International (MSCI). Used with
permission. Morgan Stanley Country
indices are unmanaged indices which
include those stocks making up the
largest two-thirds of each country's
total stock market capitalization.
Returns reflect the reinvestment of
all distributions. This chart is for
illustrative purposes only and is
not indicative of the past, present
or future performance of any
specific investment. Investors
cannot invest directly in stock
indices.
--------------------------------------
[CHART]
--------------------------------------
Source: Morgan Stanley Capital
International, December 1995. Used
with permission. This chart
represents the capitalization of
major world stock markets as measured
by the Morgan Stanley Capital
International (MSCI) World Index. The
total market capitalization is based
on the value of 1579 companies in 22
countries (representing approximately
60% of the aggregate market value of
the stock exchanges). This chart is
for illustrative purposes only and
does not represent the allocation of
any Prudential Mutual Fund.
A-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 (1926-1994)
[CHART]
- ---------
Source: Stocks, Bonds, Bills, and Inflation 1995 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 1926-1994.
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 Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of
annual total returns for major stock and bond indices for the period from
December 31, 1975 through December 31, 1995. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stocks (S&P 500), one-third foreign stocks (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.
[CHART]
- ---------
* 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.
A-4
<PAGE>
APPENDIX--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.
A-5
<PAGE>
- ---------
/1/ Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to
Prudential Jennison Fund, Inc. and BlackRock Financial Management, Inc. as
subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
/2/ As of December 31, 1994.
APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds . See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1995. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs
for employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs more than 92,000 persons worldwide, and maintains a
sales force of approximately 13,000 agents and 5,600 financial advisors.
Prudential is a major issuer of annuities, including variable annuities.
Prudential seeks to develop innovative products and services to meet consumer
needs in each of its business areas. Prudential uses the rock of Gibraltar as
its symbol. The Prudential rock is a recognized brand name throughout the
world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($11.4 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for more
than 1.7 million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, Institutional Investor ranked Prudential the third
largest institutional money manager of the 300 largest money management
organizations in the United States as of December 31, 1994. As of December 31,
1995, Prudential had more than $314 billion in assets under management.
Prudential's Money Management Group (of which Prudential Mutual Funds is a key
part) manages over $190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteenth largest mutual
fund companies 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.
A-6
<PAGE>
- ---------
/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/ Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
/5/ Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
/6/ As of December 31, 1994.
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 Fund, a growth-
style equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase./3/ Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
A-7
<PAGE>
- ---------
/7/ As of December 31, 1994.
/8/ On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./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.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five Prudential Securities' analysts were ranked as first-team 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.
A-8
<PAGE>
Prudential Mutual Funds
BUILDING YOUR FUTURE
ON OUR STRENGTH/SM/ (LOGO)
BULK RATE
Prudential Mutual Funds U.S. POSTAGE
One Seaport Plaza PAID
New York, NY 10292 Permit 6807
(800) 225-1852 New York, NY
74437E107
74437E206 MF168E2
74437E305 Cat# 42M155P
74437E404
(ICON)
Prudential
Jennison
Fund, Inc.
SEMI
ANNUAL
REPORT
March 31, 1996
Prudential Mutual Funds
BUILDING YOUR FUTURE
ON OUR STRENGTH/SM/ (LOGO)
<PAGE>
Prudential Jennison Fund, Inc.
Performance At A Glance.
The Prudential Jennison Fund began investing on November 2, 1995. It finished
the reporting period ended March 31, 1996 with positive returns, but trailed the
average capital appreciation fund. Weakness in technology stocks, in which
nearly a third of the Fund was invested, held back performance. Despite the
recent volatility of technology stocks, we remain committed to them and to the
stocks of other companies which exhibit attractive, above-average, and long-term
growth prospects.
<TABLE>
<CAPTION>
Cumulative Total Returns/1/ As of 3/31/96
Since Since
Inception/2/ Inception/2/
(Without Sales Charge) (With Sales Charge)
<S> <C> <C>
Class A 3.9% -1.3%
Class B 3.6 -1.4
Class C 3.6 2.6
Class Z/3/ N/A N/A
Lipper Capital Appreciation Avg/4/ 8.7 N/A
</TABLE>
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
/1/Source: Prudential Mutual Fund Management and Lipper Analytical Services. The
Fund charges a maximum front-end sales load of 5% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1% and 1% for six years. Class C shares have a 1% CDSC for one
year. Class B shares will automatically convert to Class A shares on a quarterly
basis after approximately seven years. Class Z shares are not subject to a sales
charge or a distribution fee. No average annual total returns are shown because
the Fund has been in operation for less than one year.
/2/Inception date: 11/2/95 for Class A, Class B and Class C shares; 4/15/96 for
Class Z shares.
/3/Class Z shares were first offered on 4/15/96 and are currently available only
to participants in the PSI 401(k) Plan, an employee benefit plan sponsored by
Prudential Securities.
/4/These are the average returns of 183 funds in the capital appreciation
category since inception of the Fund, as determined by Lipper Analytical
Services.
How Investments Compared.
(As of 3/31/96)
(CHART)
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 yields 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. The 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.
U.S. Taxable 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.
* 19 years for General Muni Debt Funds.
<PAGE>
David Poiesz, Fund Manager
Peter Reinemann, Associate Fund Manager (PHOTO)
Portfolio
Managers' Report (PHOTO)
The Prudential Jennison Fund seeks long-term growth of capital by primarily
investing in stocks of established companies with above-average growth
prospects. The Fund may also invest in stocks from foreign issuers, investment
grade bonds, and securities (including mortgage backed securities) issued or
guaranteed by the U.S. government and its agencies. There can be no assurance
that the Fund's investment objective will be achieved.
Strategy Session.
- --------------------------------------------------------------------------------
Our strategy is to identify and purchase stocks with sales and earnings that
are -- or will be -- higher than that of the average company. We believe that
these stocks will have the potential for attractive, long-term capital
appreciation.
During the past five months, we invested in companies that met this criteria.
For example, we bought Boeing, a large aircraft manufacturer, and pharmaceutical
giant Johnson & Johnson. These companies delivered superior earnings growth and
their investors were rewarded by a rising stock price.
We also saw growth potential in technology stocks and invested nearly a third
of the Fund's assets in them. Unfortunately, technology stocks -- particularly
those of personal computer, cellular telephone and semiconductor companies --
faltered in November and December of 1995 and then again in March of 1996. The
market forces that affected these stocks are discussed in the "And Not So Well"
portion of this letter.
If technology stocks were such a disappointment, why didn't we sell them?
Because we thought -- and continue to think -- that their long-term capital
appreciation potential was compelling. In fact, short-term setbacks caused by
a bad earnings report or other business-related development can either expose
the underlying weakness of a bad company or obscure the strength of a good one.
We think the latter is true of the technology stocks we own.
A Focus On Technology.
Expressed as a percentage of
total net assets as of 3/31/96.
(CHART)
Off And Running.
The Prudential Jennison Fund has concluded its first five months of operations
and we would like to thank you for your support. Growth stock investors should
expect periods of uncertainty in their pursuit of higher returns. Still,
weathering a volatile market is never easy. It's best to keep a long-term
focus on your investment.
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Over the past five months, careful stock selection helped the Fund's returns.
Here are a few examples:
Boeing Takes Off.
Boeing, a well-established aircraft manufacturer, was an early purchase and a
good one. We liked this stock for several reasons -- the company received a
major upswing in orders for replacement aircraft; new aircraft orders were up
and the roll out of Boeing's new 777 airliner appeared successful. These events
led the company to expand its production rate. We expect similar good news in
the future.
Healthy Prospects For
Drugs & HMOs.
We also seized opportunities in the pharmaceutical and health-care industries.
Among drug manufacturers, we targeted companies that had recently consolidated
or restructured their businesses, enabling them to once again generate new
products. Our favorites included Johnson & Johnson, Pfizer, Eli Lilly, Astra
and SmithKline Beecham.
In the health maintenance organization (HMO) industry we purchased United
Healthcare. Our investment strategy looks at long-term prospects, and we
believe United Healthcare's are good. The trend toward managed health care is
growing as more corporations and small businesses seek to control medical
expenses. As this occurs, companies like United Healthcare should be major
players.
And Not So Well.
- --------------------------------------------------------------------------------
Tech Stocks Short-Circuit.
As stated earlier, nearly a third of the Fund's assets were invested in
technology stocks. Unfortunately, these stocks -- particularly manufacturers
of personal computers, cellular telephones and semiconductors -- came under
pressure as the Fund was launched. Here is a brief overview of what occurred:
.Personal computer companies were hurt by excessive inventories and competition
which led to lower stock prices.
.Cellular phone manufacturers and services were hindered by a general market
slowdown caused by new and changing technological standards for cellular phone
equipment.
.Semiconductor businesses suffered as a matter of course because their two
major markets -- personal computers and cell phones -- had less demand for
semiconductors.
Consumer demand should help personal computer stock prices turn around fairly
quickly. In turn, increased computer sales should also lead to higher prices
for semiconductor stocks. Cellular phone companies face a somewhat longer road,
but we believe their stock prices will show strength again once technological
issues are resolved later this year.
Five Largest Issuers.
3.4% Boeing Co.
3.1% Walt Disney Co.
2.5% Cisco Systems, Inc.
2.4% Astra AB
2.4% United Healthcare Corp.
Expressed as a percentage of total net assets as of 3/31/96.
Looking Ahead.
- --------------------------------------------------------------------------------
As we went to press, the economy's direction was still unclear. Some reports
indicate that the economy is strengthening while others show the opposite. This
is also a presidential election year, which adds another degree of uncertainty.
Taken together these factors may spell more volatility for stock prices in the
coming months.
The Prudential Jennison Fund should do well in a moderate growth, low inflation
and stable interest rate environment. We also believe that investors will
rediscover the growth potential inherent in technology stocks. If this happens,
the Fund is well-positioned to take advantage of rising technology stock prices.
- --------------------------------------------------------------------------------
1
<PAGE>
President's Letter May 1, 1996
[PHOTO]
Dear Shareholder:
Last year, stocks and bonds generally posted extraordinary returns. Investors
celebrated this performance by putting record amounts of new money into mutual
funds in the first few months of 1996. According to figures released by the
Investment Company Institute, a mutual fund industry trade group, new
investments in mutual funds reached an all-time monthly high of $33 billion in
January of 1996. An additional $47 billion was invested in February and March.
While we are pleased that mutual funds are attracting new investors, we're
concerned that some of them may be "buying last year's returns." Few expect
1995's virtual non-stop returns from the stock and bond markets. In fact,
1996's markets have been volatile so far (stock and bond prices go down just
as they go up). There's no better time than now to be talking with your
Financial Advisor or Registered Representative. She or he can help you
determine reasonable expectations about both the potential performance and
risks associated with your investments.
- --------------------------------------------------------------------------------
Board of Directors Election.
Late this summer, we'll be sending you a notice about a special shareholder
meeting to elect new Prudential mutual fund boards of directors. Your Board of
Directors has approved a proposal to place a common board of experienced
directors across many of Prudential's mutual funds to improve business
efficiency and reduce costs to your fund(s). The materials you'll receive
this summer will contain more complete information about this proposal.
- --------------------------------------------------------------------------------
Changes at Prudential.
Finally, there have been some important changes recently at Prudential that
were made with you in mind. Prudential Mutual Funds has moved under the
umbrella of Prudential's newly created "Money Management Group." This group
manages and administers nearly $190 billion in client assets and provides mutual
funds, annuities, defined benefit and defined contribution plans to our
individual and institutional investors. We plan to improve the range and
quality of investment products and services that we can provide you by better
leveraging Prudential's strengths. There will, however, be no change in the
service you receive from your Financial Advisor, Registered Representative or
our Customer Service unit.
We're excited about our future and hope that you are, too. Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
/s/ Richard A. Redeker
Richard A. Redeker
President
- --------------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of March 31, 1996
(Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--96.9%
COMMON STOCKS--96.9%
- ---------------------------------------------------------------
Aerospace/Defense--3.4%
94,500 Boeing Co. $ 8,186,063
- ---------------------------------------------------------------
Airlines--1.8%
56,000 Delta Airlines, Inc. 4,305,000
- ---------------------------------------------------------------
Beverages--3.3%
35,100 Coca-Cola Co. 2,900,137
80,000 PepsiCo Inc. 5,060,000
------------
7,960,137
- ---------------------------------------------------------------
Biotechnology--1.1%
27,900 Chiron Corp. (a) 2,741,175
- ---------------------------------------------------------------
Business Services--7.9%
100,000 CUC International, Inc. (a) 2,925,000
94,200 Eagle River Interactive, Inc. (a) 1,224,600
59,600 First Data Corp. 4,201,800
112,800 Omnicom Group, Inc. 5,076,000
86,000 Reuters Holdings PLC (ADR)
(United Kingdom) 5,600,750
------------
19,028,150
- ---------------------------------------------------------------
Cellular Communications--1.3%
85,300 Vodafone Group PLC (ADR)
(United Kingdom) 3,198,750
- ---------------------------------------------------------------
Computer Systems/Peripherals--4.9%
168,800 EMC Corp. (a) 3,692,500
59,300 Hewlett-Packard Co. 5,574,200
48,000 Seagate Technology, Inc. (a) 2,628,000
------------
11,894,700
- ---------------------------------------------------------------
EDP Software & Services--12.3%
72,000 America Online Inc. 4,032,000
85,600 AutoDesk, Inc. 3,231,400
75,600 Computer Associates International,
Inc. 5,414,850
62,000 General Motors Corp., Class E $ 3,534,000
48,700 Intuit Inc. 2,191,500
82,200 Macromedia Inc. (a) 3,514,050
47,000 Microsoft Corp. (a) 4,846,875
61,800 SAP AG (ADR) (Germany) 2,950,950
------------
29,715,625
- ---------------------------------------------------------------
Financial Companies--2.0%
148,300 Federal National Mortgage Assn. 4,727,062
- ---------------------------------------------------------------
Health Care Services--5.1%
96,000 Healthsouth Corp. (a) 3,264,000
78,400 PhyCor, Inc. (a) 3,449,600
92,600 United Healthcare Corp. 5,694,900
------------
12,408,500
- ---------------------------------------------------------------
Household & Personal Care Products--1.9%
28,900 Duracell International, Inc. 1,434,163
61,900 Gillette Co. 3,203,325
------------
4,637,488
- ---------------------------------------------------------------
Hotels--2.4%
20,500 Hilton Hotels Corp. 1,927,000
63,300 ITT Corp. 3,798,000
------------
5,725,000
- ---------------------------------------------------------------
Industrial Tech/Instruments--1.2%
81,900 Symbol Technologies, Inc. (a) 2,876,738
- ---------------------------------------------------------------
Insurance--4.3%
28,800 CIGNA Corp. 3,290,400
49,700 ITT Hartford Group, Inc. 2,435,300
83,400 MGIC Investment Corp. 4,545,300
------------
10,271,000
- ---------------------------------------------------------------
Machinery--1.1%
66,400 Harnischfeger Industries, Inc. 2,573,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of March 31, 1996
(Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ---------------------------------------------------------------
Media--4.4%
115,400 Disney (Walt) Co. $ 7,371,175
73,300 Infinity Broadcasting Corp., Class
A (a) 3,179,387
------------
10,550,562
- ---------------------------------------------------------------
Networking--3.9%
128,900 Cisco Systems, Inc. (a) 5,977,737
86,500 3Com Corp. (a) 3,449,187
------------
9,426,924
- ---------------------------------------------------------------
Oil Services--1.0%
31,500 Schlumberger, Ltd. 2,492,438
- ---------------------------------------------------------------
Pharmaceuticals--11.6%
124,800 Astra AB Class A (ADR) (Sweden) 5,787,600
51,900 Ciba-Geigy AG (ADR) (Switzerland) 3,230,775
47,700 Johnson & Johnson Co. 4,400,325
76,000 Lilly (Eli) & Co. 4,940,000
76,900 Pfizer Inc. 5,152,300
83,900 Smith Kline Beecham PLC (ADR)
(United Kingdom) 4,320,850
------------
27,831,850
- ---------------------------------------------------------------
Publishing--1.3%
44,700 Scholastic Corp. (a) 3,073,125
- ---------------------------------------------------------------
Retail--10.3%
139,900 AutoZone, Inc. (a) 4,739,112
90,000 Corporate Express, Inc. (a) 2,970,000
138,500 General Nutrition Companies, Inc.
(a) 3,462,500
115,400 Gymboree Corp. (a) 3,014,825
70,300 Home Depot, Inc. 3,365,613
50,200 Kohl's Corp. (a) 3,181,425
55,800 Micro Warehouse, Inc. (a) 2,315,700
22,200 NIKE, Inc. 1,803,750
------------
24,852,925
Semiconductors & Related Devices--5.4%
82,500 Intel Corp. $ 4,692,187
135,500 International Rectifier Corp. (a) 2,439,000
105,300 KLA Instruments Corp. (a) 2,382,413
135,600 LSI Logic Corp. 3,627,300
------------
13,140,900
- ---------------------------------------------------------------
Telecommunications Equipment--3.2%
110,200 Ericsson (L.M.) Telephone Co. (ADR)
(Sweden) 2,355,525
47,000 Nokia AB (ADR) (Finland) 1,609,750
76,600 Tellabs, Inc. (a) 3,705,525
------------
7,670,800
- ---------------------------------------------------------------
Telephones--1.8%
141,900 MCI Communications Corp. 4,292,475
------------
Total long-term investments
(cost $220,038,850) 233,580,387
</TABLE>
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000)
- -------- ---------
SHORT-TERM INVESTMENT--2.8%
- ----------------------------------------------------------------
Corporate Notes--2.8%
<C> <C> <S> <C>
P1 $ 6,684 Ford Motor Credit Corp.
5.38%, 4/1/96
(cost $6,684,000) 6,684,000
- ----------------------------------------------------------------
Total Investments--99.7%
(cost $226,722,850; Note 4) 240,264,387
Other assets in excess of
liabilities--0.3% 644,936
------------
Net Assets--100% $240,909,323
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
4 See Notes to Financial Statements.
<PAGE>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets March 31, 1996
--------------
Investments, at value (cost $226,722,850).................................................................. $240,264,387
Cash....................................................................................................... 44,293
Receivable for Fund shares sold............................................................................ 3,613,745
Receivable for investments sold............................................................................ 1,360,851
Dividends and interest receivable.......................................................................... 208,417
Deferred expenses and other assets......................................................................... 230,130
--------------
Total assets............................................................................................ 245,721,823
--------------
Liabilities
Payable for investments purchased.......................................................................... 3,428,870
Payable for Fund shares reacquired......................................................................... 902,502
Accrued expenses and other liabilities..................................................................... 211,144
Distribution fees payable.................................................................................. 152,124
Management fee payable..................................................................................... 117,860
--------------
Total liabilities....................................................................................... 4,812,500
--------------
Net Assets................................................................................................. $240,909,323
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 23,243
Paid-in capital in excess of par........................................................................ 233,402,585
--------------
233,425,828
Accumulated net investment loss......................................................................... (469,661)
Accumulated net realized loss on investments............................................................ (5,588,381)
Net unrealized appreciation on investments.............................................................. 13,541,537
--------------
Net assets, March 31, 1996................................................................................. $240,909,323
--------------
--------------
Class A:
Net asset value and redemption price per share
($71,302,592 / 6,863,673 shares of common stock issued and outstanding).............................. $10.39
Maximum sales charge (5.0% of offering price)........................................................... .55
--------------
Maximum offering price to public........................................................................ $10.94
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($156,909,428 / 15,152,747 shares of common stock issued and outstanding)............................ $10.36
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($12,697,303 / 1,226,160 shares of common stock issued and outstanding).............................. $10.36
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
Statement of Operations (Unaudited)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
November 2, 1995(a)
Through
Net Investment Income March 31, 1996
<S> <C>
Income
Dividends............................ $ 578,402
Interest............................. 283,597
-------------------
Total income...................... 861,999
-------------------
Expenses
Distribution fee--Class A............ 62,056
Distribution fee--Class B............ 495,519
Distribution fee--Class C............ 43,189
Management fee....................... 472,159
Transfer agent's fees and expenses... 64,000
Registration fees.................... 63,000
Custodian's fees and expenses........ 38,000
Reports to shareholders.............. 36,000
Amortization of deferred organization
expense........................... 20,663
Audit fee and expenses............... 12,500
Directors' fees...................... 11,250
Legal fees and expenses.............. 9,000
Miscellaneous........................ 4,324
-------------------
Total expenses.................... 1,331,660
-------------------
Net investment loss..................... (469,661)
-------------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investment
transactions......................... (5,588,381)
Net unrealized appreciation of
investments.......................... 13,541,537
-------------------
Net gain on investments................. 7,953,156
-------------------
Net Increase in Net Assets Resulting
from Operations......................... $ 7,483,495
-------------------
-------------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
PRUDENTIAL JENNISON FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
November 2, 1995(a)
Increase (Decrease) Through
in Net Assets March 31, 1996
<S> <C>
Operations
Net investment loss.................. $ (469,661)
Net realized loss on investments..... (5,588,381)
Net unrealized appreciation on
investments....................... 13,541,537
-------------------
Net increase in net assets resulting
from operations................... 7,483,495
-------------------
Fund share transactions (Note 5)
Net proceeds from shares sold........ 270,604,646
Cost of shares reacquired............ (37,278,818)
-------------------
Net increase in net assets from Fund
share transactions................ 233,325,828
-------------------
Total increase.......................... 240,809,323
Net Assets
Beginning of period..................... 100,000
-------------------
End of period........................... $ 240,909,323
-------------------
-------------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
Prudential Jennison Fund, Inc (the ``Fund''), which was incorporated in Maryland
on August 10, 1995, is registered under the Investment Company Act of 1940, as a
diversified, open-end management investment company. The Fund had no significant
operations other than the issuance of 3,334 shares of Class A and 3,333 shares
of each Class B and Class C common stock for $100,000 on September 13, 1995 to
Prudential Mutual Fund Management, Inc. (``PMF''). Investment operations
commenced on November 2, 1995.
The Fund's investment objective is to achieve long-term growth of capital by
investing primarily in equity securities (common stock, preferred stock and
securities convertible into common stock) of established companies with
above-average growth prospects.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Securities listed on a securities exchange (other than
options on securities and indices) are valued at the last sales price on the day
of valuation, or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day as provided by a pricing
service. 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 average of the most recently quoted bid and
asked prices provided by a principle market maker or dealer. Options on
securities and indices traded on an exchange are valued at the average of 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 market quotations
are not readily available are valued at fair value as 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.
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 or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; 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 (loss), other than distribution fees, and realized and
unrealized 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.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income, if any, semi-annually and to make distributions of any net capital gains
at least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Deferred Organization Expenses: Approximately $250,000 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 entered into a management agreement with PMF. PMF is an indirect
wholly-owned subsidiary of The Prudential Insurance Company of America
(``Prudential'').
The management fee paid PMF will be computed daily and payable monthly, at an
annual rate of .60 of 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and Jennison Associates Capital
Corp. (``Jennison''), a wholly-owned subsidiary of Prudential, Jennison
furnishes investment advisory services in connection with the management of the
Fund. Under the Subadvisory Agreement, Jennison, subject to the supervision of
PMF, is responsible for managing the assets of the Fund in accordance with its
investment objectives, investment program and policies. Jennison determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
PMF pays Jennison a subadvisory fee at an annual rate of .30 of 1% of the
average daily net assets of the Fund up to and including $300 million and .25 of
1% of such assets in excess of $300 million. PMF also pays the cost of
- --------------------------------------------------------------------------------
7
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
compensation of officers and employees of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The Fund has a distribution agreement with Prudential Securities Incorporated
(``PSI''), which acts as the distributor of the 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 are
accrued daily and payable monthly.
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.
With respect to the Class A Plan, PSI has agreed to limit its
distribution-related costs to .25 of 1% of average daily net assets for the
fiscal year ending September 30, 1996. With respect to the Class B and Class C
Plans, the Fund compensates PSI for its distribution-related fees at an annual
rate of 1% of the average daily net assets.
PSI has advised the Fund that it has received approximately $2,500,000 in
front-end sales charges resulting from sales of Class A shares during the period
ended March 31, 1996. From these fees, PSI paid such sales charges to Pruco
Securities Corporation and affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the period ended March 31, 1996, it received
approximately $63,000 and $2,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders, respectively.
PSI is a wholly-owned subsidiary of Prudential.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended March 31,
1996, the Fund incurred fees of approximately $60,000 for the services of PMFS.
As of March 31, 1996, approximately $26,000 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 March 31, 1996 were $262,386,656 and $36,759,424,
respectively.
The federal income tax cost basis of the Fund's investments at March 31, 1996,
was $227,397,851 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $12,866,536 (gross unrealized
appreciation-$23,022,844; gross unrealized depreciation--$10,156,308).
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. The Fund will commence
offering Class Z shares on April 15, 1996. 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 contigent 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.
There are 2.5 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, 500 million and 500 million authorized
shares, respectively.
Transactions in shares of common stock for the period November 2, 1995
(commencement of operations) through March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Shares sold......................... 9,776,881 $ 98,801,764
Shares reacquired................... (2,916,542) (30,029,290)
---------- ------------
Net increase in shares
outstanding....................... 6,860,339 $ 68,772,474
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Shares sold......................... 15,791,915 $158,817,765
Shares reacquired................... (642,501) (6,531,020)
---------- ------------
Net increase in shares
outstanding....................... 15,149,414 $152,286,745
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Shares sold......................... 1,293,658 $ 12,985,117
Shares reacquired................... (70,831) (718,508)
---------- ------------
Net increase in shares
outstanding....................... 1,222,827 $ 12,266,609
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL JENNISON FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
November 2, November 2, November 2,
1995(a) 1995(a) 1995(a)
Through Through Through
March 31, March 31, March 31,
1996 1996 1996
----------- ----------- -----------
<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) (.03)
Net realized and unrealized gain on investment transactions.......................... .39 .39 .39
----------- ----------- -----------
Total from investment operations.................................................. .39 .36 .36
----------- ----------- -----------
Net asset value, end of period....................................................... $ 10.39 $ 10.36 $ 10.36
----------- ----------- -----------
----------- ----------- -----------
TOTAL RETURN(c)...................................................................... 3.90% 3.60% 3.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)...................................................... $71,303 $ 156,909 $12,697
Average net assets (000)............................................................. $60,165 $ 120,106 $10,468
Ratios to average net assets(b):
Expenses, including distribution fees............................................. 1.18% 1.93% 1.93%
Expenses, excluding distribution fees............................................. .93% .93% .93%
Net investment loss............................................................... (.09)% (.84)% (.84)%
Portfolio turnover rate.............................................................. 19% 19% 19%
Average commission rate paid per share............................................... $ .0595 $ .0595 $ .0595
</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.
- --------------------------------------------------------------------------------
9
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund
Some mutual fund shareholders won't ever read this -- they don't read annual
and semi-annual reports. It's quite understandable. These annual and semi-annual
reports are prepared to comply with Federal regulations. They are often written
in language that is difficult to understand. So when most people run into those
particularly daunting sections of these reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read, in hopes you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "At A Glance" page where we compare the Fund and the comparable average
calculated by Lipper Analytical Services, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's performance
- -- it generally smoothes out returns and gives you an idea how much the Fund
has earned in an average year, for a given time period. Under the performance
box, you'll see legends that explain the performance information, whether fees
and sales charges have been included in returns, and the inception dates for
the Fund's share classes.
See the performance comparison charts at the back of the report for more
performance information. And keep in mind that past performance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager who invests your money for you reports on successful
- -- and not-so-successful -- strategies in this section of your report. Look
for recent purchases and sales here, as well as information about the sectors
the portfolio manager favors and any changes that are on the drawing board.
Portfolio Of Investments
This is where the report begins to look technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
<PAGE>
Statement Of Assets
And Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes) and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are
being paid or issued to you. The net asset value fluctuates daily along with
the value of every security in the portfolio.
Statement Of
Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your
money). You'll also see capital gains here -- both realized and unrealized.
Statement Of Changes
In Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it -- through dividends and
distributions -- and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial
Statements
This is the kind of technical material that can intimidate readers, but it does
contain useful information. The Notes provide a brief history and explanation of
your Fund's objectives. In addition, they also outline how Prudential Mutual
Funds prices securities. The Notes also explain who manages and distributes the
Fund's shares, and more importantly, how much they are paid for doing so.
Finally, the Notes explain how many shares are outstanding and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages, but on a per share
basis. It is designed to help you understand how the Fund performed and to
compare this year's performance and expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted accounting
principles.
Tax Information
This is information which we report annually about how much of your total
return is taxable. Should you have any questions, you may want to consult a
tax advisor.
Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever is
shorter). To help you put that return in context, we are required to include the
performance of an unmanaged, broad based securities index, as well. The index
does not reflect the cost of buying the securities it contains or the cost of
managing a mutual fund. Of course, the index holdings do not mirror those of the
fund -- the index is a broadly based reference point commonly used by investors
to measure how well they are doing. A definition of the selected index is also
provided. Investors generally cannot invest directly in an index.
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund
- --------------------------------------------------------------------------------
Change Your Mind.
You can exchange your shares in most Prudential Mutual Funds for shares in most
other Prudential Mutual Funds, without charges. This may be most helpful if your
investment needs change.
- --------------------------------------------------------------------------------
Reinvest Dividends Free Of Charge.
Reinvest your dividends and/or capital gains distributions automatically --
without charge.
- --------------------------------------------------------------------------------
Invest For Retirement.
There is no minimum investment for an IRA. Plus, you defer taxes on your
investment earnings by investing in an IRA.
If you'd like, you can contribute up to $2,000 a year in an IRA. If you are
married, you and your spouse (if not working outside the home) can contribute
up to $2,250 a year. (Withdrawals are taxed as ordinary income and may be
subject to a 10% penalty prior to age 59 1/2.)
- --------------------------------------------------------------------------------
Change Your Job.
You can take your pension with you. Use a rollover IRA to manage your
company-sponsored retirement plan while retaining the special tax-deferred
advantages.
- --------------------------------------------------------------------------------
Invest In Your Children.
There's no fee to open a custodial account for a child's education or other
needs.
- --------------------------------------------------------------------------------
Take Income.
Would you like to receive monthly or quarterly checks in any amount from your
fund account? Just let us know. We'll take care of it. Of course, there are
minimum amounts. And shares redeemed may be subject to tax, and Class B and C
shares may be subject to contingent deferred sales charges. We'll gladly
answer your questions.
- --------------------------------------------------------------------------------
Keep Informed.
We want to keep you up-to-date. Of course, you receive account activity
statements every quarter. But you also receive annual and semi-annual fund
reports, as well as other important updates on events that affect your
investments, including tax information.
This material is only authorized for distribution when preceded or accompanied
by a current prospectus. Read the prospectus carefully before you invest or send
money.
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
(800) 225-1852
http:\\www.prudential.com
Directors
Thomas R. Anderson
Eugene C. Dorsey
Richard A. Redeker
Robin B. Smith
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Ellyn C. Acker, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
Jennison Associates Capital Corp.
466 Lexington Avenue
New York, NY 10017
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, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
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 March 31, 1996 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>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
November 16, 1995
We are pleased to provide you with the Annual Report of The Prudential
Institutional Fund for the year ended September 30, 1995. The period was
generally characterized by bullish financial markets which, along with strong
cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $784.9 million at September 30, 1995 from $493.1 million at
September 30, 1994. The Fund has seven portfolios, each with a distinct
investment objective designed to allow shareholders the opportunity to select
various options to match different goals and risk tolerances.
Economy
Gross Domestic Product grew at a rate of 3.3% this fiscal year, compared to
4.4% the last fiscal year. The Fed ended its relentless pattern of rate
increases (six hikes during 1994) and cut short-term interest rates .25% in
July, 1995. The economy appears to be moving ahead at a reasonable pace, albeit
at one that's slower than 1994.
Leading indicators have been trending sideways --housing and auto sales
remain high but are off earlier peaks and employment remains relatively stable.
Restrained growth in both wages and consumer prices have kept inflation under
control. Although inflation isn't a problem, moderate economic growth led the
Fed to shelve any plans for further interest rate cuts.
Market Review
Returns for the U.S. stock and bond markets were lackluster toward the end of
1994. By the first quarter of 1995, the financial markets welcomed slower
economic growth and the S&P 500 Index returned nearly 10% --one of the best
quarters on record. Despite turmoil in the foreign exchange markets, bonds
rallied steadily throughout the first quarter. The surprisingly strong 1995
rally in stocks and bonds continued right through the third quarter. By the end
of September, 1995, the S&P 500 Index was up 29.7% for the fiscal year, while
the Lehman Government/Corporate Bond Index was up 14.3%.
Foreign stocks, as measured by the Morgan Stanley Europe, Australia and Far
East Index (EAFE), gained 5.8%. This relative performance is a reversal from
fiscal 1994 when the EAFE index outperformed both the S&P 500 Index and Lehman
index returns.
Fund Performance
As a result of the strength in the financial markets, each of the Fund's
portfolios achieved absolute positive returns for the year. For the most part,
comparable benchmarks proved difficult to surpass. Since each portfolio's
inception, returns have been very positive and compare satisfactorily versus the
benchmarks. This performance information along with comments from each
portfolio's adviser and portfolio holdings may be found on the following pages.
Summary
While we do not expect gains of this magnitude to be repeated in the near
future, we believe that investors who stick with a disciplined approach to
investing their retirement savings should be rewarded over the long term. We
look forward to continuing to meet the retirement and investment needs of our
shareholders.
Sincerely,
Mark R. Fetting
President
1
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to achieve long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
INVESTMENT APPROACH: The Adviser concentrates
on large capitalization companies with the potential for above-average growth.
Stocks are selected on a company-by-company basis through the use of fundamental
analysis.
The Adviser looks for companies that demonstrate superior sales growth, high
levels of unit growth, high return on assets and equity, and a strong balance
sheet, as well as being attractively valued in the judgment of the Adviser.
ADVISER: The Growth Stock Fund is managed by Jennison Associates Capital Corp.
Founded in 1969 and acquired by The Prudential in 1985, Jennison adheres to
clearly defined investment philosophies and is dedicated to achieving superior
investment results for institutional investors. Jennison manages over $28
billion in equity, balanced, and fixed income accounts at September 30, 1995.
ADVISER'S COMMENTS: For the year ended September 30, 1995, the Fund increased
35.1% versus the market overall, as measured by the S&P 500, which improved
29.7% in the same period. The Lipper Growth Fund Average increased 25.9% over
the same period. This positive performance can be attributed mostly to
particularly strong performance in three areas: financial services, capital
spending, and technology. The lower interest rate environment which began in
November 1994 helped boost interest rate sensitive stocks in the portfolio.
Strong capital spending both domestically and abroad helped bolster the current
and future earnings prospects of many capital goods producers. In technology,
there are a number of evolving long-term trends which have, and should continue
to have, both positive earnings and valuation consequences for companies in the
portfolio.
Throughout the past year we have had substantial net, positive earnings estimate
surprises. This has been a key to the out performance of the Fund and is the key
to our objective over time. Our goal is to own the best growth stocks we can
find at a reasonable valuation.
By and large we remain optimistic about growth stocks in a slow economic growth
environment like we are currently experiencing, which is characterized by low
inflation and low interest rates. As always, growth stocks will be more volatile
than the market overall, but we believe there are ample opportunities for
companies with growing revenue and earnings to provide significant positive
returns.
PERFORMANCE RESULTS:
<TABLE>
<CAPTION>
Average Annual Returns Fund S&P 500
-------------------------- ------------- --------
<S> <C> <C>
One Year ended 9/30/95 +35.14% +29.74%
From Inception (11/5/92) +18.34% +15.40%
</TABLE>
Returns from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. The Manager is currently limiting the
expenses of the Fund. Without this reduction of expenses, the total return would
have been lower.
2
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment
(CHART)
-------------- Growth Stock Fund - - - - S&P 500 Index
Past performance is no guarantee of future results and an investor's
shares may be worth more or less than their original cost.
This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in The Prudential Institutional Fund:
Growth Stock Fund (the ``Fund'') with a similar investment in the
Standard & Poor's 500 Index (S&P 500) by portraying the initial account
value at the commencement of operations and subsequent account values at
the end of each fiscal year (September 30) beginning in 1992. For
purposes of the graph and, unless otherwise indicated in the
accompanying table, it has been assumed that all recurring fees
(including management fees) were deducted and all dividends and
distributions were reinvested.
The S&P 500 is a capital-weighted index, representing the aggregate
market value of the common equity of 500 stocks primarily traded on the
New York Stock Exchange. The S&P 500 is an unmanaged index and includes
the reinvestment of all dividends, but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Fund. The securities which comprise the S&P 500 may differ substantially
from the securities in the Fund's portfolio. S&P 500 is not the only
index that may be used to characterize performance of growth funds and
other indices may portray different comparative performance.
3
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS
Common Stocks--98.7%
Aerospace/Defense--2.4%
78,200 Boeing Co.......................... $ 5,337,150
-----------
Airlines--1.9%
56,900 AMR Corp.(a)....................... 4,103,913
-----------
Beverages--3.0%
49,500 Coca-Cola Co....................... 3,415,500
61,000 PepsiCo Inc........................ 3,111,000
-----------
6,526,500
-----------
Commercial Services--1.4%
90,850 CUC International, Inc.(a)......... 3,168,394
-----------
Computer Software & Services--14.3%
55,400 America Online Inc................. 3,808,750
78,300 AutoDesk, Inc...................... 3,425,625
85,300 Cisco Systems, Inc.(a)............. 5,885,700
Computer Associates International,
72,150 Inc.............................. 3,048,337
36,400 Macromedia Inc..................... 2,079,350
52,900 Microsoft Corp.(a)................. 4,787,450
64,600 SAP AG (ADR) (Germany)............. 3,544,925
62,300 Silicon Graphics Inc.(a)........... 2,141,563
87,400 Symbol Technologies, Inc.(a)....... 2,895,125
-----------
31,616,825
-----------
Cosmetics & Soaps--1.7%
79,300 Gillette Co........................ 3,776,663
-----------
Drugs & Medical Supplies--7.4%
109,000 Astra AB Class A (Sweden).......... 3,904,135
44,900 Lilly (Eli) & Co................... 4,035,388
62,900 Merck & Co., Inc................... 3,522,400
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Smith Kline Beecham PLC (ADR)
94,300 (United Kingdom)................. $ 4,773,937
-----------
16,235,860
-----------
Electronics--11.1%
104,400 Hewlett-Packard Co................. 8,704,350
131,500 Intel Corp......................... 7,906,437
102,000 Motorola, Inc...................... 7,790,250
-----------
24,401,037
-----------
Financial Services--7.3%
43,900 Federal National Mortgage Assn..... 4,543,650
35,900 First Financial Mgmt. Corp......... 3,504,737
27,200 Morgan Stanley Group, Inc.......... 2,614,600
61,500 Mutual Risk Management, Ltd........ 2,429,250
61,800 The PMI Group Inc.................. 2,927,775
-----------
16,020,012
-----------
Health Care Services--0.6%
53,800 Value Health, Inc.(a).............. 1,425,700
-----------
Hospital Management--1.9%
86,100 United Healthcare Corp............. 4,208,138
-----------
Insurance--1.1%
American International Group,
29,450 Inc.............................. 2,503,250
-----------
Leisure--3.8%
94,300 Disney (Walt) Co................... 5,410,462
99,600 Harrahs Entertainment Inc.(a)...... 2,913,300
-----------
8,323,762
-----------
Lodging--0.8%
75,300 Promus Cos., Inc.(a)............... 1,713,075
-----------
Machinery--1.2%
78,300 Harnischfeger Industries, Inc...... 2,613,263
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Media--7.1%
Clear Channel Communications,
44,400 Inc.(a).......................... $ 3,363,300
News Corp. Ltd. (ADR)
120,100 (Australia)...................... 2,642,200
48,900 Omnicom Group...................... 3,184,613
Reuters Holdings PLC (ADR)
70,100 (United Kingdom)................. 3,706,537
43,800 Scholastic Corp.(a)................ 2,748,450
-----------
15,645,100
-----------
Miscellaneous Basic Industry--4.2%
36,000 Applied Materials, Inc.(a)......... 3,681,000
62,400 Cerner Corp.(a).................... 2,137,200
27,300 ITT Corp........................... 3,385,200
-----------
9,203,400
-----------
Miscellaneous Consumer Growth--0.9%
29,900 Eastman Kodak Co................... 1,771,575
7,000 Luxottica Group (ADR) (Italy)...... 342,125
-----------
2,113,700
-----------
Office Equipment & Supplies--1.3%
58,000 Compaq Computer Corp.(a)........... 2,805,750
-----------
Railroads--1.1%
37,800 Union Pacific Corp................. 2,504,250
-----------
Restaurants--2.5%
Lone Star Steakhouse & Saloon,
69,400 Inc.(a).......................... 2,845,400
68,000 McDonald's Corp.................... 2,601,000
-----------
5,446,400
-----------
Retail--4.6%
122,300 AutoZone, Inc.(a).................. 3,118,650
85,350 Dollar General Corp................ 2,507,156
55,533 Home Depot, Inc.................... 2,214,379
46,400 Kohls Corp. (a).................... 2,407,000
-----------
10,247,185
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Technology--10.8%
74,600 Adobe Systems, Inc................. $ 3,860,550
37,800 Broderbund Software Inc............ 2,877,525
34,233 Chiron Corp.(a).................... 3,098,086
35,700 Cirrus Logic, Inc.(a).............. 2,043,825
59,500 Intuit Inc......................... 2,796,500
123,900 LSI Logic Corp.(a)................. 7,155,225
101,800 Pyxis Corp.(a)..................... 1,972,375
-----------
23,804,086
-----------
Telecommunications--4.8%
74,700 Nokia Corp. (ADR) (Finland)........ 5,210,325
46,800 Tellabs, Inc.(a)................... 1,971,450
Vodafone Group PLC (ADR)
82,100 (United Kingdom)................. 3,366,100
-----------
10,547,875
-----------
Transportation--1.5%
Wisconsin Central Transportation
48,900 Corp.(a)......................... 3,264,075
-----------
Total common stocks
(cost $163,489,413)................ 217,555,363
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- --------
Repurchase Agreement--2.2%
$ 4,819 Joint Repurchase Agreement Account,
6.39%, 10/2/95 (Note 5)
(cost $4,819,000)................ 4,819,000
-----------
Total Investments--100.9%
(cost $168,308,413; Note 4)........ 222,374,363
Liabilities in excess of other
assets--(0.9%)................... (1,868,969)
-----------
Net Assets--100%................... $220,505,394
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
5
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
------------
<S> <C>
ASSETS
Investments, at value
(a)...................... $222,374,363
Cash....................... __
Foreign currency, at value
(cost $153,643).......... --
Receivable for investments
sold..................... 1,199,509
Interest and dividends
receivable............... 162,987
Receivable for Fund shares
sold..................... 789,547
Due from Manager........... __
Deferred expenses and other
assets................... 29,670
------------
Total assets........... 224,556,076
------------
LIABILITIES
Payable for investments
purchased................ 2,555,583
Payable for Fund shares
reacquired............... 1,286,353
Accrued expenses........... 77,378
Due to broker-variation
margin................... --
Management fee payable..... 107,403
Administration fee
payable.................. 23,965
------------
Total liabilities...... 4,050,682
------------
NET ASSETS................. $220,505,394
------------
------------
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 13,604
Paid-in capital in excess
of par................... 169,441,843
------------
169,455,447
Undistributed net
investment income........ --
Accumulated net realized
gain (loss) on
investments.............. (3,016,003)
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 54,065,950
------------
Net assets, September 30,
1995..................... $220,505,394
------------
------------
Shares of beneficial
interest issued and
outstanding.............. 13,604,202
------------
------------
Net asset value per
share.................... $ 16.21
------------
------------
(a) Identified cost........ $168,308,413
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
------------
<S> <C>
NET INVESTMENT INCOME
Income
Interest................. $ 198,002
Dividends (a)............ 1,190,186
------------
Total income........... 1,388,188
------------
Expenses
Management fee........... 1,049,893
Administration fee....... 201,075
Custodian's fees and
expenses................. 88,000
Registration fees........ 63,000
Transfer agent's fees and
expenses............... 36,092
Reports to
shareholders............. 25,000
Amortization of
organization
expenses............... 13,385
Legal fees............... 11,000
Audit fee................ 12,000
Trustees' fees........... 8,572
Miscellaneous............ 6,056
------------
Total expenses......... 1,514,073
Expense subsidy (Note
2)..................... (14,225)
------------
Net expenses............... 1,499,848
------------
Net investment income
(loss)................... (111,660)
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENT
AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss)
on:
Securities............... 820,651
Futures transactions..... __
Foreign currency
transactions............. (5,798)
------------
814,853
------------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 47,538,274
Financial futures
contracts................ --
------------
47,538,274
------------
Net gain on investments and
foreign currencies....... 48,353,127
------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS................. $ 48,241,467
------------
------------
</TABLE>
(a) Net of foreign withholding taxes of $26,902.
See Notes to Financial Statements.
44
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
---------------------------
Year Ended September 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
Operations
Net investment income
(loss)............... $(111,660) $25,287
Net realized gain
(loss) on investments
and foreign currency
transactions......... 814,853 (3,778,648)
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 47,538,274 3,531,929
------------ -------------
Net increase (decrease)
in net assets
resulting from
operations........... 48,241,467 (221,432)
------------ -------------
Net equalization
credits................. -- 44,776
------------ -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (48,781) (43,709)
------------ -------------
Distributions to
shareholders from net
realized gains....... -- (131,129)
------------ -------------
Fund share transactions
Net proceeds from
shares sold.......... 138,943,130 80,605,272
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 48,781 174,838
Cost of shares
redeemed............. (73,635,171) (21,470,653)
------------ -------------
Net increase in net
assets from Fund
share transactions... 65,356,740 59,309,457
------------ -------------
Net increase............ 113,549,426 58,957,963
NET ASSETS
Beginning of year...... 106,955,968 47,998,005
------------ -------------
End of year............. $220,505,394 $106,955,968
------------ -------------
------------ -------------
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
----------------------------------------------
November 5,
1992(a)
Year Ended September 30, Through
---------------------------- September 30,
1995 1994 1993
--------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 12.00 $ 12.10 $ 10.00
--------- ------------- -------------
Income from investment operations:
Net investment income(b)...................... -- -- .04
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. 4.22 (.06) 2.08
--------- ------------- -------------
Total from investment operations............. 4.22 (.06) 2.12
--------- ------------- -------------
Less distributions:
Dividends from net investment income.......... (.01) (.01) (.02)
Distributions from net realized gains......... -- (.03) --
--------- ------------- -------------
Total distributions........................... (.01) (.04) (.02)
--------- ------------- -------------
Net asset value, end of period................ $ 16.21 $ 12.00 $ 12.10
--------- ------------- -------------
--------- ------------- -------------
TOTAL RETURN(d)............................... 35.14% (0.50)% 21.22%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 220,505 $ 106,956 $47,998
Average net assets (000)...................... $ 149,985 $ 71,449 $17,592
Ratios to average net assets: (b)
Expenses..................................... 1.00% 1.00% 1.00%(c)
Net investment income........................ (.07)% .04% .31%(c)
Portfolio turnover rate....................... 64% 65% 84%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
See Notes to Financial Statements.
47
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The Prudential Institutional Fund (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. (``PIFM'').
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
Securities, that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer. Forward currency
51
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
exchange contracts shall be valued at the current cost of covering or offsetting
such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
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 Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized 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.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange
52
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal year. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal year. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of net unrealized appreciation/
depreciation on securities and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Equalization: During the fiscal year ended September 30, 1995, the Funds
(except for the Income and Money Market Funds) discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per-share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The following balances of undistributed net investment income at
September 30, 1994, resulting from equalization were transferred to paid-in
capital in excess of par for each of the respective Funds:
Growth Stock Fund $ 90,444
Stock Index Fund 398,227
International Stock Fund 881,462
Active Balanced Fund 788,116
Balanced Fund 899,912
Such reclassifications have no effect on net assets, results of operations,
or net asset value per share of the Funds.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the ``ex-dividend'' date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
53
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company 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.
For the year ended September 30, 1995, the application of this statement
affected undistributed net investment income (``UNI''), accumulated net realized
gain (loss) on investments (``G/L'') and paid-in capital in excess of par
(``PIC'') by the following amounts:
<TABLE>
<CAPTION>
UNI G/L PIC
--------- -------- ---------
<S> <C> <C> <C>
Growth Stock Fund $ 141,451 $ 5,798 $(147,249)
International Stock Fund (81,325) 81,325 --
Active Balanced Fund (107,185) 107,185 --
Balanced Fund (112,634) 112,634 --
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation (``PIC''), Jennison Associates Capital Corp. (``Jennison'') and
Mercator Asset Management, Inc. (``Mercator''), each a wholly-owned subsidiary
of Prudential. Each subadviser will furnish investment advisory services in
connection with the management of the various Funds. Jennison serves as
subadviser to the Growth Stock Fund and the Active Balanced Fund. PIC serves as
subadviser to the Balanced Fund, the Stock Index Fund, the Income Fund and the
Money Market Fund. Mercator serves as subadviser to the International Stock
Fund. PIFM will pay for the costs and expenses attributable to the subadvisory
agreements and the salaries and expenses of all personnel of the Company except
for fees and expenses of unaffiliated Trustees. The Funds will bear all other
costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
Fund Management Fee
- -------------------------- ---------------
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so
54
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
long as the total expense ratios do not exceed certain predetermined levels
set forth in the Company's prospectus. For the year ended September 30, 1995,
PIFM subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- ------------------------- ------------- ------------------
<S> <C> <C>
Growth Stock Fund .01% $ .001
Stock Index Fund .28 .025
International Stock Fund .04 .002
Active Balanced Fund .05 .004
Balanced Fund .10 .005
Income Fund .28 .027
Money Market Fund .32 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. (``PMF''), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. (``PMFS''). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Other Transactions with Affiliates
For the year ended September 30, 1995, Prudential Securities Incorporated, an
affiliate of PIFM, earned approximately $1,000 in brokerage commissions from
portfolio transactions executed on behalf of the Balanced Fund.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $166,285,606 $94,901,288
Stock Index Fund 31,191,257 6,793,307
International Stock Fund 51,878,167 22,058,837
Active Balanced Fund 55,254,010 24,449,598
Balanced Fund 51,413,549 41,017,407
Income Fund 72,942,188 62,818,679
</TABLE>
On September 30, 1995, the Stock Index Fund purchased 62 financial futures
contracts on the S&P 500 Index expiring December, 1995. The cost of such
contracts was $18,040,975. The value of such contracts on September 30, 1995 was
$18,234,200, thereby resulting in an unrealized gain of $193,225.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/ Gross Unrealized
Fund Basis Depreciation Appreciation Depreciation
- ------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $168,492,267 $ 53,882,096 $55,631,552 $1,749,456
Stock Index Fund 80,984,245 15,486,856 16,243,442 756,586
International Stock
Fund 120,016,426 17,315,559 19,620,167 2,304,608
Active Balanced
Fund 121,485,163 12,020,860 12,744,154 723,294
Balanced Fund 74,648,132 6,340,696 6,845,882 505,186
Income Fund 56,738,626 894,526 1,086,048 191,522
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1994 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund $3,796,000 --
International Stock Fund -- $186,000
Income Fund 828,000 --
</TABLE>
55
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
Growth Stock Fund $2,825,300
Income Fund 723,300
The average monthly balance of dollar rolls outstanding during the year ended
September 30, 1995 for the Income Fund was approximately $4,142,000. The amount
of dollar rolls outstanding at September 30, 1995 was $5,940,665, which was
10.2% 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. At September 30,
1995, the Company had a 9.01% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $65,929,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .66% $ 4,819,000
Stock Index Fund 1.71 12,494,000
International Stock Fund 1.12 8,175,000
Active Balanced Fund 3.50 25,625,000
Balanced Fund 1.00 7,338,000
Income Fund 1.02 7,478,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.375%, in the principal amount of $225,000,000,
repurchase price $225,119,531, due 10/2/95. The value of the collateral
including accrued interest was $229,660,959.
BT Securities Corp., 6.10%, in the principal amount of $56,863,000,
repurchase price $56,891,905, due 10/2/95. The value of the collateral including
accrued interest was $58,082,904.
Goldman, Sachs & Co., 6.45%, in the principal amount of $225,000,000,
repurchase price $225,120,938, due 10/2/95. The value of the collateral
including accrued interest was $229,500,013.
Smith Barney, Inc., 6.43%, in the principal amount of $225,000,000,
repurchase price $225,120,563, due 10/2/95. The value of the collateral
including accrued interest was $229,500,366.
Note 6. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the years ended
September 30, 1995 and 1994 were as follows:
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
56
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Year ended September 30, 1994:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 6,739,890 14,450 (1,804,735) 4,949,605
Stock Index Fund 2,697,792 52,328 (744,579) 2,005,541
International Stock
Fund 6,022,403 42,326 (1,702,734) 4,361,995
Active Balanced Fund 5,244,905 81,781 (1,404,380) 3,922,306
Balanced Fund 3,900,150 118,117 (556,779) 3,461,488
Income Fund 1,613,971 216,368 (809,032) 1,021,307
Money Market Fund 32,311,167 1,277,602 (17,493,001) 16,095,768
</TABLE>
Of the shares outstanding at September 30, 1995, PIFM and affiliates owned
the following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 4,724,608
Stock Index Fund 3,429,256
International Stock Fund 4,962,191
Active Balanced Fund 2,396,951
Balanced Fund 3,356,418
Income Fund 2,889,945
Money Market Fund 27,811,405
</TABLE>
57
<PAGE>
THE PRUDENTIAL INDEPENDENT
(LOGO) INSTITUTIONAL AUDITORS' REPORT
FUND
The Shareholders and Trustees of
The Prudential Institutional Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Prudential Institutional Fund
(consisting of the Growth Stock Fund, Stock Index Fund, International Stock
Fund, Active Balanced Fund, Balanced Fund, Income Fund and Money Market Fund),
as of September 30, 1995, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1995, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting The Prudential Institutional Fund as of
September 30, 1995, the results of their operations, the changes in their net
assets, and the financial highlights for the periods presented in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 16, 1995
58
<PAGE>
THE PRUDENTIAL FEDERAL INCOME
(LOGO) INSTITUTIONAL TAX INFORMATION
FUND
As required by the Internal Revenue Code, we wish to advise you as to the
federal tax status of dividends and distributions paid by the Funds during their
fiscal year ended September 30, 1995.
Detailed below, please find the aggregate dividends and distributions, per
share, paid by each Fund during the fiscal year ended September 30, 1995 as well
as the corporate dividend received deduction percentage:
<TABLE>
<CAPTION>
Ordinary Dividends* Long-Term Total Corporate
------------------------- Capital Dividends Dividend
Short-Term Gains and Received
Fund Income Capital Gains Distributions Distributions Deduction
- ---- ------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Stock Fund $.005 -- -- $.005 100%
Stock Index Fund .215 $.025 $.010 .250 87
International Stock Fund .107 .060 .258 .425 --
Active Balanced Fund .290 .010 .025 .325 23
Balanced Fund .255 .005 .040 .300 24
Income Fund .594 -- -- .594 --
Money Market Fund .053 -- -- .053 --
</TABLE>
* For federal income tax purposes, ordinary income dividends and short-term
capital gains distributions are taxable as ordinary income. Long-term capital
gains distributions are taxable as capital gains income.
59
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
May 20, 1996
We are pleased to provide you with the Semi-Annual Report of The Prudential
Institutional Fund for the six months ended March 31, 1996. A combination of
continued gains in the equity markets, albeit with more volatility, along with
strong cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $957.9 million at March 31, 1996 from $784.9 million at September
30, 1995. The Fund has seven portfolios, each with a distinct investment
objective designed to allow investors the opportunity to select various options
to match different goals and risk tolerances.
Economy
The U.S. economy is growing sluggishly, on the order of 2% per year and
inflation is restrained at just under 3% per year. At the outset of 1996, the
focus of most commentators was on the deceleration of growth at the end of 1995
and the potentially debilitating effects of adverse weather conditions in early
1996. The prevailing fear was that the U.S. was slipping into or possibly
already in the midst of a recession. Sentiment has shifted dramatically and
market commentators are now talking about the ``growth scare'' that is pushing
interest rates higher. The focal point for this shift in sentiment about the
economy was Fed Chairman Greenspan's February statement to Congress on the state
of the economy. Subsequent employment reports that were much better than
expected added to the new sentiment that ``strong'' underlying economic growth
of 2% or more would force interest rates higher.
Market Review
The February shift in sentiment about the economy led to a dramatic shift in
the U.S. stock and bond markets. At that point, the S&P 500 was at its all-time
high of 661 and the yield on 30-year U.S. Treasuries was about 6.0%. Greenspan's
statement can essentially serve as the demarcation point to end the 1995 stock
and bond rallies. From that point until the end of March, long-term treasury
yields rose about 70 basis points to 6.7% and the S&P 500 fluctuated in the 640
to 660 range, ending the period at 645. For the six month period as a whole,
stocks gained nearly 12%, while bonds returned about 2.4% as measured by the
Lehman Aggregate Index.
Foreign stocks, as represented by the Morgan Stanley Europe, Australia and
Far East Index (EAFE) moved in roughly the same pattern as the U.S. stock market
during this six month period but the gain in foreign stocks was a more modest
7%.
Fund Performance
As a result of the continued strength in the financial markets, each of the
Fund's portfolios achieved absolute positive returns for the six month period.
Since each portfolio's inception, returns have been very positive and compare
satisfactorily versus the benchmarks. This performance information and portfolio
holdings along with comments from each portfolio's adviser may be found on the
following pages.
1
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
Summary
The economy and markets are in an uncertain period characterized by
heightened volatility. This underscores our belief that investors need to focus
on the longer-term and continue to exercise a disciplined approach to investing
their retirement savings. We look forward to continuing to provide you with the
investment options and services you need to help you accomplish your goals.
Sincerely,
Mark R. Fetting
President
2
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to achieve long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
INVESTMENT APPROACH: The Adviser concentrates
on large capitalization companies with the potential for above-average growth.
Stocks are selected on a company-by-company basis through the use of fundamental
analysis.
The Adviser looks for companies that demonstrate superior sales growth, high
levels of unit growth, high return on assets and equity, and a strong balance
sheet, as well as being attractively valued in the judgment of the Adviser.
ADVISER: The Growth Stock Fund is managed by Jennison Associates Capital Corp.
Founded in 1969 and acquired by The Prudential in 1985, Jennison adheres to
clearly defined investment philosophies and is dedicated to achieving superior
investment results for institutional investors. Jennison managed approximately
$30 billion in equity, balanced, and fixed income accounts at March 31, 1996.
ADVISER'S COMMENTS: Over the six month period ended March 31, 1996, the most
obvious issue in the portfolio was the upheaval in technology stocks, an area of
significant growth in the portfolio over time. This correction in technology
stocks is not unusual for this sector. ``Tech'' stocks are often volatile
because their underlying fundamentals have historically been more volatile in
the short term. The complexity for investors is that investment decisions must
be made over a reasonable time frame in order to capture the potential long-term
return that comes from growth. In general, we focus our attention on a company's
growth prospects over a 12-18 month time horizon. Short-term problems may either
be a precursor of long-term problems or may represent opportunities. While there
have been some short term fundamental disappointments, at this point we feel
that the opportunities far outweigh the risks in the group and therefore
continue to maintain a substantial over-weighting relative to the S&P 500. The
sector diversification in the portfolio has allowed us to withstand a
substantial ``hit'' in technology stocks, not without pain, but by and large our
non-technology holdings continue to do well.
As a result of the ongoing complexity in the economy, where some days the
expectation is recession and others it's runaway inflation, the consumer staple
stocks still look attractive due to their ability to deliver earnings growth in
almost any environment. With the group rotation going on in the market overall,
there is the need to maintain our focus on owning stocks of companies which are
delivering earnings growth while not ``over-paying'' in terms of valuation. We
look forward to the months ahead with the expectation that the attractive
valuations in the portfolio will be better recognized for the growth inherent in
the companies, especially in technology.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS:
Periods ended 3/31/96 Fund S&P 500
-------------------------- ------- --------
<S> <C> <C>
Six Months................ 5.43% 11.71%
One Year.................. 31.56% 32.10%
From Inception (11/5/92).. 17.25% 16.73%
</TABLE>
Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
The S&P 500 Index is a commonly used unmanaged indicator of stock market
performance.
3
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS
Common Stocks--98.5%
Aerospace/Defense--3.5%
115,500 Boeing Co.......................... $10,005,188
-----------
Airlines--1.7%
56,800 AMR Corp.(a)....................... 5,083,600
-----------
Automobiles & Trucks--1.4%
69,200 General Motors Corp................ 3,944,400
-----------
Beverages--3.1%
40,800 Coca-Cola Co....................... 3,371,100
87,300 PepsiCo Inc........................ 5,521,725
-----------
8,892,825
-----------
Capital Goods--0.6%
34,100 Duracell International Inc......... 1,692,213
-----------
Chemicals--1.4%
3,170 Ciba-Geigy Ltd. (Switzerland)...... 3,961,502
-----------
Commercial Services--1.3%
125,750 CUC International, Inc.(a)......... 3,678,188
-----------
Computer Software & Services--18.0%
93,400 3Com Corp.(a)...................... 3,724,325
110,800 America Online Inc................. 6,204,800
84,800 AutoDesk, Inc...................... 3,201,200
162,800 Cisco Systems, Inc.(a)............. 7,549,850
Computer Associates International,
93,950 Inc.............................. 6,729,169
206,900 EMC Corp.(a)....................... 4,525,937
100,300 Macromedia Inc..................... 4,287,825
57,100 Microsoft Corp.(a)................. 5,888,437
71,000 SAP AG (ADR) (Germany)............. 3,390,250
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
54,400 Seagate Technology, Inc.(a)........ $ 2,978,400
104,300 Symbol Technologies, Inc.(a)....... 3,663,538
-----------
52,143,731
-----------
Cosmetics & Soaps--1.2%
66,700 Gillette Co........................ 3,451,725
-----------
Drugs & Medical Supplies--10.4%
156,500 Astra AB Class A (Sweden).......... 7,234,170
58,300 Johnson & Johnson Co............... 5,378,175
98,200 Lilly (Eli) & Co................... 6,383,000
80,000 Pfizer Inc......................... 5,360,000
Smith Kline Beecham PLC (ADR)
108,900 (United Kingdom)................. 5,608,350
-----------
29,963,695
-----------
Electronics--5.9%
76,600 Hewlett-Packard Co................. 7,200,400
96,700 Intel Corp......................... 5,499,813
160,900 LSI Logic Corp.(a)................. 4,304,075
-----------
17,004,288
-----------
Financial Services--6.3%
184,700 Federal National Mortgage Assn..... 5,887,312
68,833 First Data Corp.................... 4,852,726
70,500 Mutual Risk Management, Ltd........ 2,916,938
106,600 The PMI Group Inc.................. 4,650,425
-----------
18,307,401
-----------
Hospital Management--3.8%
90,300 Phycor, Inc.(a).................... 3,973,200
112,500 United Healthcare Corp............. 6,918,750
-----------
10,891,950
-----------
Insurance--2.4%
33,100 CIGNA Corp......................... 3,781,675
63,700 ITT Hartford Group Inc............. 3,121,300
-----------
6,902,975
-----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Leisure--4.4%
132,500 Disney (Walt) Co................... $ 8,463,437
72,200 ITT Corp. (New).................... 4,332,000
-----------
12,795,437
-----------
Lodging--0.8%
24,400 Hilton Hotels Corp................. 2,293,600
-----------
Machinery--1.1%
83,700 Harnischfeger Industries, Inc...... 3,243,375
-----------
Media--8.1%
Clear Channel Communications,
93,600 Inc.(a).......................... 5,288,400
154,100 Eagle River Interactive Inc.(a).... 2,003,300
128,800 Omnicom Group...................... 5,796,000
Reuters Holdings PLC (ADR)
100,300 (United Kingdom)................. 6,532,037
54,700 Scholastic Corp.(a)................ 3,760,625
-----------
23,380,362
-----------
Miscellaneous Basic Industry--0.9%
77,500 Applied Materials, Inc.(a)......... 2,702,813
-----------
Petroleum Services--1.1%
Schlumberger, Ltd. (ADR)
39,100 (Netherlands).................... 3,093,788
-----------
Restaurants--1.6%
Lone Star Steakhouse & Saloon,
122,500 Inc.(a).......................... 4,685,625
-----------
Retail--9.6%
153,100 AutoZone, Inc.(a).................. 5,186,262
117,100 Corporate Express, Inc.(a)......... 3,864,300
168,000 General Nutrition Cos., Inc.(a).... 4,200,000
137,400 Gymboree Corp.(a).................. 3,589,575
74,833 Home Depot, Inc.................... 3,582,630
65,400 Kohls Corp.(a)..................... 4,144,725
73,900 Micro Warehouse, Inc.(a)........... 3,066,850
-----------
27,634,342
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Technology--2.6%
41,500 Broderbund Software Inc............ $ 1,566,625
32,333 Chiron Corp.(a).................... 3,176,717
60,500 Intuit Inc......................... 2,722,500
-----------
7,465,842
-----------
Telecommunications--6.3%
Ericsson (L.M.) Telephone Co.,
136,600 (ADR) (Sweden)................... 2,919,825
161,700 MCI Communications Corp............ 4,891,425
54,600 Nokia Corp. (ADR) (Finland)........ 1,870,050
97,000 Tellabs, Inc.(a)................... 4,692,375
Vodafone Group PLC (ADR)
101,500 (United Kingdom)................. 3,806,250
-----------
18,179,925
-----------
Transportation--1.0%
Wisconsin Central Transportation
44,400 Corp.(a)......................... 2,952,600
-----------
Total common stocks
(cost $221,117,430)................ 284,351,390
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- --------
Repurchase Agreement--1.4%
$ 4,122 Joint Repurchase Agreement Account,
5.35%, 04/01/96 (Note 4)
(cost $4,122,000)................ 4,122,000
-----------
Total Investments--99.9%
(cost $225,239,430; Note 3)........ 288,473,390
Other assets in excess of
liabilities--0.1%................ 398,096
-----------
Net Assets--100%................... $288,871,486
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
5
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND MARCH 31, 1996
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
------------
<S> <C>
Assets
Investments, at value
(a)...................... $288,473,390
Cash....................... 571
Foreign currency, at value
(cost $120,455).......... --
Receivable for investments
sold..................... 1,843,811
Interest and dividends
receivable............... 244,056
Receivable for Fund shares
sold..................... 836,874
Deferred expenses and other
assets................... 22,618
------------
Total assets........... 291,421,320
------------
Liabilities
Payable for investments
purchased................ 1,894,523
Payable for Fund shares
reacquired............... 379,951
Accrued expenses........... 59,193
Due to broker - variation
margin................... --
Management fee payable..... 184,161
Administration fee
payable.................. 32,006
------------
Total liabilities...... 2,549,834
------------
Net Assets................. $288,871,486
------------
------------
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 16,906
Paid-in capital in excess
of par................... 223,817,874
------------
223,834,780
Undistributed net
investment income
(loss)................... (362,804)
Accumulated net realized
gain (loss) on
investments.............. 2,165,314
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 63,234,196
------------
Net assets, March 31,
1996..................... $288,871,486
------------
------------
Shares of beneficial
interest issued and
outstanding.............. 16,906,186
------------
------------
Net asset value per
share.................... $ 17.09
------------
------------
(a) Identified cost........ $225,239,430
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
------------
<S> <C>
Net Investment Income
Income
Interest................. $ 142,475
Dividends (a)............ 835,346
------------
Total income........... 977,821
------------
Expenses
Management fee........... 885,234
Administration fee....... 168,078
Custodian's fees and
expenses................. 46,000
Registration fees........ 34,000
Transfer agent's fees and
expenses............... 28,969
Reports to
shareholders............. 15,000
Legal fees............... 7,500
Amortization of
organization
expenses............... 6,693
Audit fee................ 6,000
Trustees' fees........... 6,000
Miscellaneous............ 1,762
------------
Total expenses......... 1,205,236
Expense recovery
(subsidy) (Note 2)..... 59,383
------------
Net expenses............... 1,264,619
------------
Net investment income
(loss)................... (286,798)
------------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss) on:
Securities
transactions............. 5,181,317
Financial futures
contracts................ --
Foreign currency
transactions............. (76,006)
------------
5,105,311
------------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 9,168,246
Financial futures
contracts................ --
------------
9,168,246
------------
Net gain (loss) on
investments and foreign
currencies............... 14,273,557
------------
Net Increase in Net Assets
Resulting from
Operations................. $ 13,986,759
------------
------------
</TABLE>
(a) Net of foreign withholding taxes of $17,997, $1,988, $160,696, $1,168 and
$4,070, respectively.
See Notes to Financial Statements.
38
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND (UNAUDITED)
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
---------------------------
Six Months Year
Ended Ended
March 31, September 30,
1996 1995
------------ ------------
<S> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ (286,798) $ (111,660)
Net realized gain
(loss) on investments
and foreign currency
transactions......... 5,105,311 814,853
Net change in
unrealized
appreciation
on investments and
foreign currencies... 9,168,246 47,538,274
------------ -------------
Net increase in net
assets resulting from
operations........... 13,986,759 48,241,467
------------ -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... -- (48,781)
Distributions to
shareholders from net
realized gains....... -- --
------------ -------------
Total dividends and
distributions........ -- (48,781)
------------ -------------
Fund share transactions
Net proceeds from
shares sold.......... 133,171,200 138,943,129
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ -- 48,781
Cost of shares
redeemed............. (78,791,867) (73,635,170)
------------ -------------
Net increase in net
assets from Fund
share transactions... 54,379,333 65,356,740
------------ -------------
Net increase............ 68,366,092 113,549,426
Net Assets
Beginning of period.... 220,505,394 106,955,968
------------ -------------
End of period.......... $288,871,486 $ 220,505,394
------------ -------------
------------ -------------
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL (UNAUDITED)
FUND
<TABLE>
<CAPTION>
GROWTH
STOCK
FUND
---------------------------------------------------------
November 5,
Six Months Year Ended September 1992(a)
Ended 30, Through
March 31, ----------------------- September 30,
1996 1995 1994 1993
---------- --------- --------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period.................. $ 16.21 $ 12.00 $ 12.10 $ 10.00
---------- --------- --------- ----------
Income from investment
operations:
Net investment income
(loss) (b)................. (.02) -- -- .04
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions............... .90 4.22 (.06) 2.08
---------- --------- --------- ----------
Total from investment
operations............... .88 4.22 (.06) 2.12
---------- --------- --------- ----------
Less distributions:
Dividends from net
investment income.......... -- (.01) (.01) (.02)
Distributions from net
realized gains............. -- -- (.03) --
---------- --------- --------- ----------
Total distributions........ -- (.01) (.04) (.02)
---------- --------- --------- ----------
Net asset value, end of
period..................... $ 17.09 $ 16.21 $ 12.00 $ 12.10
---------- --------- --------- ----------
---------- --------- --------- ----------
TOTAL RETURN(d)............. 5.43% 35.14% (0.50)% 21.22%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(000)...................... $288,871 $ 220,505 $ 106,956 $47,998
Average net assets (000).... $252,924 $ 149,985 $ 71,449 $17,592
Ratios to average
net assets: (b)
Expenses................... 1.00%(c) 1.00% 1.00% 1.00%(c)
Net investment income...... (.23)%(c) (.07)% .04% .31%(c)
Portfolio turnover rate..... 29% 64% 65% 84%
Average commission rate paid
per share.................. $ 0.0650 N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy/recovery.
(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.
41
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
The Prudential Institutional Fund (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. (``PIFM'').
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
Securities, that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a
45
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
recognized bank or dealer. Forward currency exchange contracts shall be valued
at the current cost of covering or offsetting such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. 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 Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized 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.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars.
46
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
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 Funds are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal period. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal period. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at period end exchange rates are reflected as a component
of net unrealized appreciation/
depreciation on securities and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the ``ex-dividend'' date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement
47
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies.
For the six months ended March 31, 1996, the application of this statement
affected undistributed net investment income (``UNI'') and accumulated net
realized gain (loss) on investments (``G/L'') by the following amounts:
<TABLE>
<CAPTION>
UNI G/L
-------- -------
<S> <C> <C>
Growth Stock Fund $(76,006) $76,006
International Stock Fund (63,741) 63,741
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi mately $450,000 of costs were
incurred in connection with the organization and initial registration of the
Company and have been deferred and are being amortized ratably over the period
of benefit not to exceed 60 months from the date each of the Funds' commenced
investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation (``PIC''), Jennison Associates Capital Corp. (``Jennison'') and
Mercator Asset Management, L.P. (``Mercator''). PIC and Jennison are
wholly-owned subsidiaries of Prudential. Each subadviser will furnish investment
advisory services in connection with the management of the various Funds.
Jennison serves as subadviser to the Growth Stock Fund and the Active Balanced
Fund. PIC serves as subadviser to the Balanced Fund, the Stock Index Fund, the
Income Fund and the Money Market Fund. Mercator serves as subadviser to the
International Stock Fund. PIFM will pay for the costs and expenses attributable
to the subadvisory agreements and the salaries and expenses of all personnel of
the Company except for fees and expenses of unaffiliated Trustees. The Funds
will bear all other costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
<TABLE>
<CAPTION>
Fund Management Fee
- ---- ---------------
<S> <C>
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
</TABLE>
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so long as the total expense ratios do not exceed
certain predetermined levels set forth in the Company's prospectus. For the six
months ended March 31, 1996, PIFM subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- ---- ------------- ------------------
<S> <C> <C>
Stock Index Fund .17% $ .011
Active Balanced Fund .002 .0001
Balanced Fund .05 .003
Income Fund .23 .011
Money Market Fund .25 .001
</TABLE>
48
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
PIFM also recovered the following amounts of operating expenses it previously
subsidized for the six months ended March 31, 1996:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Net Assets Share
------------- ------------------
<S> <C> <C>
Growth Stock Fund .05% $ .004
International Stock Fund .02 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. (``PMF''), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. (``PMFS''). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the six months ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---- ------------ -----------
<S> <C> <C>
Growth Stock Fund $125,001,676 $72,554,977
Stock Index Fund 47,804,297 948,671
International Stock Fund 28,187,107 11,866,927
Active Balanced Fund 28,778,511 23,901,019
Balanced Fund 40,800,913 29,694,202
Income Fund 30,157,486 28,424,962
</TABLE>
On March 31, 1996, the Stock Index Fund purchased 17 financial futures
contracts on the S&P 500 Index expiring June, 1996. The cost of such contracts
was $5,491,050. The value of such contracts on March 31, 1996 was $5,535,625,
thereby resulting in an unrealized gain of $44,575.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
(Depreciation)
--------------- Gross Unrealized
Fund Basis Appreciation Depreciation
- ------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $225,390,343 $63,083,047 $66,420,094 $3,337,047
Stock Index Fund 121,241,374 26,287,220 27,491,663 1,204,443
International
Stock Fund 142,221,274 21,409,852 25,461,090 4,051,238
Active Balanced
Fund 128,545,569 13,427,979 13,990,099 562,120
Balanced Fund 90,294,873 9,008,073 9,842,011 833,938
Income Fund 65,076,580 (127,771) 544,801 672,572
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1995 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
<TABLE>
<S> <C>
Growth Stock Fund $2,825,300
Income Fund 723,300
</TABLE>
The average monthly balance of dollar rolls outstanding during the six months
ended March 31, 1996 for the Income Fund was approximately $6,397,000. The
maximum amount of dollar rolls outstanding at any month-end during the six
months ended March 31, 1996 was $6,991,530 as of January 31, 1996 which was
10.8% of total assets. The amount of dollar rolls outstanding at March 31, 1996,
was $6,723,720, which was 10.2% of total assets.
49
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
Note 4. Joint Repurchase Agreement Account
The Company, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At March 31,
1996, the Company had a 4.60% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $67,021,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .28% $ 4,122,000
Stock Index Fund .41 5,929,000
International Stock Fund .77 11,189,000
Active Balanced Fund 1.64 23,888,000
Balanced Fund .71 10,344,000
Income Fund .79 11,549,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 5.30%, in the principal amount of $387,000,000,
repurchase price $387,170,925, due 4/1/96. The value of the collateral including
accrued interest was $395,137,122.
CS First Boston Corp., 5.50%, in the principal amount of $150,000,000,
repurchase price $150,068,750, due 4/1/96. The value of the collateral including
accrued interest was $153,001,819.
Goldman Sachs & Co., 5.40%, in the principal amount of $463,000,000,
repurchase price $463,208,350, due 4/1/96. The value of the collateral including
accrued interest was $472,260,747.
Nomura Securities, Inc., 5.375%, in the principal amount of $100,000,000,
repurchase price $100,044,792, due 4/1/96. The value of the collateral including
accrued interest was $102,398,695.
Smith Barney, Inc., 5.284%, in the principal amount of $355,886,000,
repurchase price $356,042,708, due 4/1/96. The value of the collateral including
accrued interest was $363,004,234.
Note 5. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the six months ended
March 31, 1996 and the year ended September 30, 1995 were as follows:
Six months ended March 31, 1996:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 8,107,640 -- (4,805,656) 3,301,984
Stock Index Fund 3,893,782 467,712 (1,694,486) 2,667,008
International Stock
Fund 3,795,911 116,606 (2,601,769) 1,310,748
Active Balanced Fund 1,438,229 483,285 (1,283,160) 638,354
Balanced Fund 1,748,784 395,938 (784,163) 1,360,559
Income Fund 780,386 162,743 (400,473) 542,656
Money Market Fund 22,399,365 1,541,128 (22,064,387) 1,876,106
</TABLE>
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
50
<PAGE>
THE PRUDENTIAL
[LOGO] INSTITUTIONAL
FUND
Of the shares outstanding at March 31, 1996, PIFM and
affiliates owned the
following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 5,800,387
Stock Index Fund 4,642,203
International Stock Fund 5,647,337
Active Balanced Fund 2,485,468
Balanced Fund 3,883,087
Income Fund 2,975,746
Money Market Fund 28,544,777
</TABLE>
Note 6. Proposed Reorganization
On May 17, 1996, the Trustees of the Fund approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Fund. Under the Plan of
Reorganization, substantially all of the assets and liabilities of the Growth
Stock Fund, Balanced Fund, Income Fund and Money Market Fund will be transferred
at net asset value for equivalent value Class Z shares of Prudential Jennison
Fund, Inc., Prudential Allocation Fund (Balanced Portfolio), Prudential
Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Funds will then cease operations. Stock Index Fund and
NOTES TO
FINANCIAL STATEMENTS
(UNAUDITED)
Active Balanced Fund will remain with The Prudential Institutional Fund (to be
renamed the Prudential Dryden Fund) as Class Z shares. Active Balanced Fund will
begin offering Classes A, B and C shares and Stock Index Fund will offer Class A
shares. International Stock Fund will join the Prudential Global Fund as a
separate series of a newly named Prudential World Fund. The existing
shareholders will become Class Z shareholders and the Fund will also begin
offering Classes A, B and C shares. The successor funds will be managed by PMF,
PMFS will provide transfer agency services and Prudential Securities
Incorporated, a wholly-owned subsidiary of Prudential, will act as distributor.
The Plan of Reorganization requires the approval of shareholders of the Fund
to become effective. A proxy will be mailed to shareholders of the Fund for
shareholder meetings in the fall of 1996. If the Plan of Reorganization is
approved, it is expected that the reorganizations will take place shortly after
the meetings. All funds involved will share pro rata in the costs of the
reorganizations.
51
<PAGE>
ITEM 15. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment
Company Act of 1940 (the 1940 Act) and pursuant to Article VI of
the Fund's By-Laws (Exhibit 2 to the Registration Statement),
officers, directors, employees and agents of the Registrant will
not be liable to the Registrant, any shareholder, officer,
director, employee, agent or other person for any action or failure
to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be
indemnified against liabilities in connection with the Registrant,
subject to the same exceptions. Section 2-418 of the Maryland
General Corporation Law permits indemnification of directors who
acted in good faith and reasonably believed that the conduct was in
the best interests of the Registrant. As permitted by Section
17(i) of the 1940 Act, pursuant to Section 10 of each Distribution
Agreement (Exhibit 6 to the Registration Statement), each
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 (Securities Act) may be permitted to
directors, 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 director, 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
director, 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 has purchased an insurance policy insuring its
C-1
<PAGE>
officers and directors against liabilities, and certain costs of
defending claims against such officers and directors, to the extent
such officers and directors 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 directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the
Registration Statement) and Section 4 of the Subadvisory Agreement
(Exhibit 5(b) to the Registration Statement) limit the liability of
Prudential Mutual Fund Management, Inc. (PMF) and Jennison
Associates Capital Corp. (Jennison), 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.
Under Section 17(h) of the 1940 Act, it is the position of the
staff of the Securities and Exchange Commission that if there is
neither a court determination on the merits that the defendant is
not liable nor a court determination that the defendant was not
guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of one's
office, no indemnification will be permitted unless an independent
legal counsel (not including a counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or
persons affiliated with these persons) determines, based upon a
review of the facts, that the person in question was not guilty of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Under its Articles of Incorporation, the Registrant may
advance funds to provide for indemnification. Pursuant to the
Securities and Exchange Commission staff's position on Section
17(h) advances will be limited in the following respect:
(1) Any advances must be limited to amounts used, or to be
used, for the preparation and/or presentation of a defense to the
action (including cost connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by,
or on behalf of, the recipient to repay that amount of the advance
which exceeds the amount to which it is ultimately determined that
C-2
<PAGE>
he is entitled to receive from the Registrant by reason of
indemnification;
(3) Such promise must be secured by a surety bond or other
suitable insurance and;
(4) Such surety bond or other insurance must be paid for by
the recipient of such advance.
ITEM 16. EXHIBITS.
1. (a) Articles of Incorporation, incorporated by reference to
Exhibit 1(a) to the Registration Statement on Form N-1A (File
No. 33-61997) filed on August 22, 1995.
(b) Articles of Amendment incorporated by reference to Exhibit
1(b) to the Registration Statement on Form N-1A (File No.
33-61997) filed on August 22, 1995.
(c) Amended and Restated Articles of Incorporation incorporated
by reference to Exhibit 1(c) to Post Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 33-
61997) filed on February 14, 1996.
2. By-Laws incorporated by reference to Exhibit 2 to the
Registration Statement on Form N-1A (File No. 33-61997) filed on
August 22, 1995.
3. Not Applicable.
4. Plan of Reorganization and Liquidation, filed herewith as
Appendix A to the Prospectus and Proxy. *
5. Instruments defining rights of shareholders incorporated by
reference to Exhibit 4 to the Registration Statement on Form
N-1A (File No. 33-61997) filed on August 22, 1995.
6. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. incorporated by reference to
Exhibit 5(a) to Post Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997)
filed on February 14, 1996.
C-3
<PAGE>
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and Jennison Associates Capital Corp. incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 1 to Registration
Statement on Form N-1A (File No. 33-61997) filed on February 14, 1996.
7. (a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated incorporated by reference to Exhibit 6(a)
to Post-Effective Amendment No. 1 to Registration Statement on
Form N-1A (File No. 33-61997) filed on February 14, 1996.
(b) Form of Selected Dealer Agreement incorporated by reference to Exhibit
No. 6(b) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
September 19, 1995.
8. Not Applicable.
9. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
10. (a) Distribution and Service Plan for Class A Shares incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 33-61997) filed on
February 14, 1996.
(b) Distribution and Service Plan for Class B Shares incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 33-61997) filed on
February 14, 1996.
(c) Distribution and Service Plan for Class C Shares incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 33-61997) filed
on February 14, 1996.
C-4
<PAGE>
11. Opinion and Consent of Counsel.*
12. Tax Opinion of Counsel.*
13. (a) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc.*
(b) Purchase Agreement, incorporated by reference to Exhibit 13 to Post-
Effective Amendment No. 1 to Registration Statement on Form N-1A
(File No. 33-61997) filed on February 14, 1996.
14. Consent of Independent Accountants. *
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy.*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940.*
(c) Prospectus of Registrant dated April 15, 1996.*
(d) Prospectus of Prudential Institutional Fund dated February 1, 1996, as
supplemented.*
(e) Statement of Additional Informaion of Prudential Institutuinal Fund
dated February 1, 1996, as supplemented.*
- ------------------
* Filed herewith.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of the Registrant by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 20th day of June, 1996.
PRUDENTIAL JENNISON FUND, INC.
By: /s/ Richard A. Redeker
-----------------------------
RICHARD A. REDEKER, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Eugene C. Dorsey Director June 20, 1996
- ---------------------------------
EUGENE C. DORSEY
/s/ Richard A. Redeker President and Director June 20, 1996
- ---------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director June 20, 1996
- ---------------------------------
ROBIN B. SMITH
/s/ Eugene S. Stark Treasurer and Principal June 20, 1996
- --------------------------------- Financial and Accounting
EUGENE S. STARK Officer
1
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBITS PAGE
- -------- ----
<S> <C> <C>
1. (a) Articles of Incorporation, incorporated by reference to
Exhibit 1(a) to the Registration Statement on Form N-1A (File
No. 33-61997) filed on August 22, 1995.
(b) Articles of Amendment incorporated by reference to Exhibit
1(b) to the Registration Statement on Form N-1A (File No.
33-61997) filed on August 22, 1995.
(c) Amended and Restated Articles of Incorporation incorporated
by reference to Exhibit 1(c) to Post Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 33-
61997) filed on February 14, 1996.
2. By-Laws incorporated by reference to Exhibit 2 to the
Registration Statement on Form N-1A (File No. 33-61997) filed on
August 22, 1995.
3. Not Applicable.
4. Plan of Reorganization and Liquidation, filed herewith as
Appendix A to the Prospectus and Proxy. *
5. Instruments defining rights of shareholders incorporated by
reference to Exhibit 4 to the Registration Statement on Form
N-1A (File No. 33-61997) filed on August 22, 1995.
6. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. incorporated by reference to
Exhibit 5(a) to Post Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997)
filed on February 14, 1996.
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Jennison Associates Capital Corp.
incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 1 to Registration Statement on Form N-
1A (File No. 33-61997) filed on February 14, 1996.
7. (a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated incorporated by reference to Exhibit 6(a)
to Post-Effective Amendment No. 1 to Registration Statement on
Form N-1A (File No. 33-61997) filed on February 14, 1996.
(b) Form of Selected Dealer Agreement incorporated by reference to Exhibit
No. 6(b) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
September 19, 1995.
8. Not Applicable.
9. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
10. (a) Distribution and Service Plan for Class A Shares incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 33-61997) filed on
February 14, 1996.
(b) Distribution and Service Plan for Class B Shares incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 33-61997) filed on
February 14, 1996.
(c) Distribution and Service Plan for Class C Shares incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 33-61997) filed
on February 14, 1996.
</TABLE>
<PAGE>
EXHIBITS PAGE
- -------- ----
11. Opinion and Consent of Counsel.*
12. Tax Opinion of Counsel.*
13. (a) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc.*
(b) Purchase Agreement, incorporated by reference to Exhibit 13 to Post-
Effective Amendment No. 1 to Registration Statement on Form N-1A
(File No. 33-61997) filed on February 14, 1996.
14. Consent of Independent Accountants. *
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy.*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940.*
(c) Prospectus of Registrant dated April 15, 1996.*
(d) Prospectus of Prudential Institutional Fund dated February 1, 1996, as
supplemented.*
(e) Statement of Additional Informaion of Prudential Institutuinal Fund
dated February 1, 1996, as supplemented.*
- ------------------
* Filed herewith.
<PAGE>
EXHIBIT 9
FORM OF
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be Held by It................-1-
2. Duties to the Custodian with Respect to Property of The Fund Held By
the Custodian in the United States...................................-2-
2.1 Holding Securities.............................................-2-
2.2 Delivery of Securities.........................................-2-
2.3 Registration of Securities.....................................-6-
2.4 Bank Accounts..................................................-7-
2.5 Availability of Federal Funds..................................-7-
2.6 Collection of Income...........................................-8-
2.7 Payment of Fund Monies.........................................-8-
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased.....................................................-11-
2.9 Appointment of Agents.........................................-11-
2.10 Deposit of Securities in Securities Systems...................-11-
2.10A Fund Assets Held in the Custodian's Direct Paper System.-13-
2.11 Segregated Account............................................-14-
2.12 Ownership Certificates for Tax Purposes.......................-15-
2.13 Proxies.......................................................-16-
2.14 Communications Relating to Fund Portfolio Securities..........-16-
2.15 Reports to Fund by Independent Public Accountants.............-16-
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States........................................-17-
3.1 Appointment of Foreign Sub-Custodians.........................-17-
3.2 Assets to be Held.............................................-17-
3.3 Foreign Securities Depositories...............................-18-
3.4 Segregation of Securities.....................................-18-
3.5 Agreements with Foreign Banking Institutions..................-18-
3.6 Access of Independent Accountants of the Fund.................-19-
3.7 Reports by Custodian..........................................-19-
3.9 Liability of Foreign Sub-Custodians...........................-20-
3.10 Liability of Custodian........................................-21-
3.11 Reimbursements for Advances...................................-21-
3.12 Monitoring Responsibilities...................................-22-
3.13 Branches of U.S. Banks........................................-22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the
Fund................................................................-23-
5. Proper Instructions.................................................-24-
6. Actions Permitted without Express Authority.........................-24-
-i-
<PAGE>
7. Evidence of Authority...............................................-25-
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.......................-26-
9. Records.............................................................-26-
10. Opinion of Fund's Independent Accountant............................-27-
11. Compensation of Custodian...........................................-27-
12. Responsibility of Custodian.........................................-27-
13. Effective Period, Termination and Amendment.........................-29-
14. Successor Custodian.................................................-30-
15. Interpretative and Additional Provisions............................-32-
16. Massachusetts Law to Apply..........................................-32-
17. Prior Contracts.....................................................-32-
18. The Parties.........................................................-32-
19. Limitation of Liability.............................................-33-
-ii-
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", and each Fund listed on Appendix A which evidences its agreement
to be bound hereby by executing a copy of this Contract (each such Fund
individually hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/ Declaration of Trust. The Fund agrees to deliver to the
Custodian all securities and cash owned by it, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, ("Shares") of
the Fund as may be issued or sold from time to time. The Custodian shall not
be responsible for
<PAGE>
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors/ Trustees of the Fund, and provided that the Custodian shall
have the same responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed as any such sub-custodian has to
the Custodian, provided that the Custodian agreement with any such domestic
sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian. The Custodian
may employ as sub-custodians for the Fund's securities and other assets the
foreign banking institutions and foreign securities depositories designated in
Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By
---------------------------------------------------------------------
the Custodian in the United States.
- ----------------------------------
2.1 Holding Securities. The Custodian shall hold and physically
------------------
segregate for the account of the Fund all non-cash property, to be held by it
in the United States, including all domestic securities owned by the Fund,
other than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry system
-2-
<PAGE>
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the
Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and
----------------------
deliver domestic securities owned by the Fund held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("Direct Paper System") only upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
(1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Fund;
(3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or
-3-
<PAGE>
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian;
(6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.9 or into the name or
nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided that,
--------
in any such case, the new securities are to be delivered to
the Custodian;
(7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
-4-
<PAGE>
(8) For exchange or conversation pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
(10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate
--------
collateral as agreed upon from time to time by the Custodian
and the Fund, which may be in the form of cash or obligations
issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury,
-5-
<PAGE>
the Custodian will not be held liable or responsible for the
delivery of securities owned by the Fund prior to the receipt
of such collateral;
(11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but
----
only against receipt of amounts borrowed;
----
(12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
(13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding
-6-
<PAGE>
account deposits in connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
(15) For any other proper business purpose, but only upon
--------
receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors/Trustees or of
the Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such
purpose to be a proper business purpose, and naming the
person or persons to whom delivery of such securities shall
be made.
2.3 Registration of Securities. Domestic securities held by the
--------------------------
Custodian (other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominees of the Fund or
-7-
<PAGE>
of any nominee of the Custodian which nominee shall be assigned exclusively to
the Fund, unless the Fund has authorized in writing the appointment of a
------
nominee to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Fund under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the Custodian shall utilize
its best efforts to timely collect income due the Fund on such securities and
to notify the Fund on a best efforts basis of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
-------------
separate bank account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the Fund,
other than cash maintained by the Fund, other than cash maintained by the Fund
in a bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for the Fund may
be deposited by it to its credit as Custodian in the Banking Department of the
Custodian or in such
-8-
<PAGE>
other banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company shall
--------
be qualified to act as a custodian under the Investment Company Act of 1940 and
that each such bank or trust company and the funds to be approved by vote of a
majority of the Board of Directors/Trustees of the Fund. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between
-----------------------------
the Fund and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the amount of
checks received in payment for Shares of the Fund which are deposited into the
Fund's account.
2.6 Collection of Income. Subject to the provisions of Section
--------------------
2.3, the Custodian shall collect on a timely basis all income and other
payments with respect to registered securities held hereunder to which the Fund
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other payments
with respect to bearer securities if, on the date of payment by the issuer,
such securities are held by the Custodian or its agent thereof and shall credit
such income, as collected, to the Fund's custodian account. Without limiting
the generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as and when
they become due and shall
-9-
<PAGE>
collect interest when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or responsibility
in connection therewith, other than to provide the Fund with such information
or data as may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions,
----------------------
which may be continuing instructions when deemed appropriate by the parties,
the Custodian shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the
account of the Fund but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in
-10-
<PAGE>
proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.10A;
(d) in the case of repurchase agreements entered into between
the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of
the receipt evidencing purchase by the Fund of securities
owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from
the Fund or (e) for transfer to a time deposit account of the
Fund in any bank, whether domestic or foreign; such transfer
may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
-11-
<PAGE>
(3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be
in whole or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
(6) For payment of the amount of dividends received in respect of
securities sold short;
(7) For any other proper purpose, but only upon receipt of,
--------
in addition to Proper Instructions, a certified copy of a
resolution of Board of Directors/Trustees or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
-12-
<PAGE>
2.8 Liability for Payment in Advance of Receipt of Securities
----------------------------------------------------------
Purchased. Except as specifically stated otherwise in this Contract, in any
- ---------
and every case where payment for purchase of securities for the account of the
Fund is made by the Custodian in advance of receipt of the securities purchased
in the absence of specific written instructions from the Fund to so pay in
advance, the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received by the
Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times
---------------------
in its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
- --------
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
-------------------------------------------
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve
-13-
<PAGE>
Board and Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
(1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
(2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities
belonging to the Fund;
(3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (i.) the making of an entry on the
records of the Custodian to reflect such payment and transfer
for the account of the Fund. The Custodian shall transfer
domestic securities sold for the account of the Fund upon (i)
receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer
-14-
<PAGE>
and payment for the account of the Fund. Copies of all
advices from the Securities System of transfers of domestic
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund in the form of a
written advice or notice and shall furnish promptly to the
Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Fund.
(4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
(5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
(6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities
System by reason of any negligence, misfeasance or misconduct
of the Custodian or any of its agents or of any of
-15-
<PAGE>
its or their employees or from failure of the Custodian or
any such agent to enforce effectively such rights as it may
have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to
the extent that the Fund has not been made whole for any such
loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
-------------------------------------------------------
Custodian may deposit and/or maintain securities owned by the Fund in the
Direct Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper
Instructions;
(2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
-16-
<PAGE>
(3) The records of the Custodian with respect to securities of
the Fund which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to
the Fund;
(4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund
upon the making of an entry on the records of the Custodian
to reflect such transfer and receipt of payment for the
account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the
Fund copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the
Fund;
(6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time;
-17-
<PAGE>
2.11 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization
or organizations, regarding escrow or other arrangements in connection with
transactions by the Fund, (ii) for purposes of segregating cash, government
securities or liquid, high-grade debt obligations in connection with options
purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate purposes,
but only, in the case of clause (iv), upon receipt of, in addition to
- --------
Proper Instructions, a certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee
-18-
<PAGE>
signed by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
---------------------------------------
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection with
transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
-------
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject
----------------------------------------------------
to the provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of calls
and maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities
-19-
<PAGE>
being held for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written information received
by the Custodian from issuers of the securities whose tender or exchange is
sought and from the party (or his agents) making the tender or exchange offer.
If the Fund desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date of which the Custodian is to take
such action.
2.15 Reports to Fund by Independent Public Accountants. The
-------------------------------------------------
Custodian shall provide the Fund, at such times as the Fund may reasonably
require, with reports by independent public accountants on the accounting
system, internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including securities
deposited and/or maintained in a Securities System, relating to the services
provided by the Custodian under this Contract; such reports shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
------------------------------------------------------------------
Outside of the United States
- ----------------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby
-------------------------------------
authorizes and instructs the Custodian to employ as sub-custodians for the
Fund's securities and other assets maintained outside the
-20-
<PAGE>
United States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this Contract,
together with a certified resolution of the Fund's Board of Directors/Trustees,
the Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the employment of
any one or more such sub-custodians for maintaining custody of the Fund's
assets.
3.2 Assets to be Held. The Custodian shall limit the securities
-----------------
and other assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in such
amounts as the Custodian or the Fund may determine to be reasonably necessary
to effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be
-------------------------------
agreed upon in writing by the Custodian and the Fund, assets of the Fund shall
be maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5
hereof.
-21-
<PAGE>
3.4 Segregation of Securities. The Custodian shall identify on its
-------------------------
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs
a foreign banking institution shall require that such institution establish a
custody account for the Custodian on behalf of the Fund and physically
segregate in that account, securities and other assets of the Fund, and, in the
event that such institution deposits the Fund's securities in a foreign
securities depository, that it shall identify on its books as belonging to the
Custodian, as agent for the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement
--------------------------------------------
with a foreign banking institution shall be substantially in the form set forth
in Exhibit I hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate
records will be maintained identifying the assets as belonging to the Fund; (d)
officers of or auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the independent public
accountants for the Fund, will be given access to the books and records of the
foreign banking institution
-22-
<PAGE>
relating to its actions under its agreement with the Custodian; and (e) assets
of the Fund held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of
---------------------------------------------
the Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such foreign
banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund
--------------------
from time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having possession of
the Fund's securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account maintained by a
foreign banking institution for the Custodian on behalf of the Fund indicating,
as to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account
---------------------------------------
(a) Except as otherwise provided in paragraph (b) of this Section
3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply, in
their entirety to the foreign securities
-23-
<PAGE>
of the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefore (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to the
same extent as set forth in Section 2.3 of this Contract, and the Fund agrees
to hold any such nominee harmless from any liability as a holder of record of
such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant
-----------------------------------
to which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian
and each Fund from and against any loss, damage, cost, expense, liability or
claim arising out of or in connection with the institution's performance of
such obligations. At the election of the Fund, it
-24-
<PAGE>
shall be entitled to be subrogated to the rights of the Custodian with respect
to any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent that
the Fund has not been made whole for any such loss, damage, cost, expense,
liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the
----------------------
acts or omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this paragraph
3.10, in delegating custody duties to State Street London Ltd., the Custodian
shall not be relieved of any responsibility to the Fund for any loss due to
such delegation, except such loss as may result from (a) political risk
(including, but not limited to, exchange control restrictions, confiscation,
expropriation, nationalization, insurrection, civil strife or armed
hostilities) or (b) other losses (excluding a bankruptcy or insolvency of State
Street London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under
-25-
<PAGE>
circumstances where the Custodian and State Street London Ltd. have exercised
reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian
--------------------------
to advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as amy arise from its or its nominee's own
negligent action, negligent failure to act or wilful misconduct, any property
at any time held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund assets to the
extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish
---------------------------
annually to the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will promptly
inform the Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any material
loss of the assets of the Fund or in the case of any foreign sub-custodian not
the subject of an exemptive order from the Securities and Exchange Commission
is notified by such foreign
-26-
<PAGE>
sub-custodian that there appears to be a substantial likelihood that its
shareholders equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 Branches of U.S. Banks
----------------------
(a) Except as otherwise set forth in this Contract, the
provisions of Article 3 shall not apply where the custody of the Fund assets
are maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction of
the Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the
-------------------------------------------------------------------
Fund.
- ----
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
-27-
<PAGE>
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or repurchase of their Shares.
In connection with the redemption or repurchase of Shares of the Fund, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of the
Fund, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Fund and the
Custodian.
The Custodian shall receive from the distributor for the Fund's Shares
or from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to
time by the Fund. The Custodian will provide timely notification to the Fund
and the Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
-------------------
Proper Instructions as used herein means a writing signed or initialled
by one or more person or persons as the officers of the Fund shall have from
time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which
-28-
<PAGE>
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. It is understood and agreed that the Board of
Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund
Management, Inc., as Manager of the Fund, and (ii) The Prudential Investment
Corporation (or Prudential-Bache Securities Inc.), as Subadviser to the Fund,
to deliver proper instructions with respect to all matters for which proper
instructions are required by this Article 5. The Custodian may rely upon the
certificate of an officer of the Manager or Subadviser, as the case may be,
with respect to the person or persons authorized on behalf of the Manager and
Subadviser, respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices provided
that the Fund and the Custodian are satisfied that such procedures afford
adequate safeguards for the Fund's assets. For purposes of this Section,
Proper Instructions shall include instructions received by the Custodian
pursuant to any three-party agreement which requires a segregated asset account
in accordance with Section 2.11.
6. Actions Permitted without Express Authority.
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
-29-
<PAGE>
(1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to the
--------
Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Directors/ Trustees pursuant to the Articles of
Incorporation/Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
-30-
<PAGE>
8. Duties of Custodian with Respect to the Books of Account and
-------------------------------------------------------------
Calculation of Net Asset Value and Net Income.
- ---------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors/Trustees of the Fund
to keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate
daily the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an office of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net
asset value per share and the daily income of the Fund shall be made at the
time or times described from time to time in the Fund's currently effective
prospectus.
9. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at
all times
-31-
<PAGE>
during the regular business hours of the Custodian be open for inspection by
duly authorized officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Fund's request, supply the Fund with a tabulation of securities owned by the
Fund and held by the Custodian and shall, when requested to do so by the Fund
and for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may
from time to time request, to obtain from year to year favorable opinions from
the Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end Fund) and Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any other requirements
of such Commission.
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract
-32-
<PAGE>
and shall be held harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to be genuine and to
be signed by the proper party or parties, including any futures commission
merchant acting pursuant to the terms of a three-party futures or options
agreement. The Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Contract but shall be kept indemnified by
and shall be without liability to the Fund for any action taken or omitted by
it in good faith without negligence. It shall be entitled to rely on and may
act upon advice of counsel (who may be counsel for the Fund) on all matters,
and shall be without liability for any action reasonably taken or omitted
pursuant to such advice. Notwithstanding the foregoing, the responsibility of
the Custodian with respect to redemptions effected by check shall be in
accordance with a separate Agreement entered into between the Custodian and the
Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained
in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank as contemplated by paragraph 3.11 hereof,
the Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from, or caused by, the direction of or
authorization by the Fund to maintain custody or any securities
-33-
<PAGE>
or cash of the Fund in a foreign country including, but not limited to, losses
resulting from nationalization, expropriation, currency restrictions, or acts
of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the
Fund assets to the extent necessary to obtain reimbursement provided, however
that, prior to disposing of Fund assets hereunder, the Custodian shall give the
Fund notice of its intention to dispose of assets identifying such assets and
the Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund
-34-
<PAGE>
wishes the Custodian to dispose of Fund assets of equal value other than those
identified in such notice.
13. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
--------
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of
1940, as amended and that the Custodian shall not act under Section 2.10A
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; provided
--------
further, however, that
- -------
-35-
<PAGE>
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation/Declaration of Trust, and further, provided, that the Fund may at
any time by action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller
of the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and
in the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver
-36-
<PAGE>
at the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract
-37-
<PAGE>
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
15. Interpretative and Additional Provisions
----------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretative or additional
--------
provisions shall contravene any applicable federal or state regulations or any
provision of the Articles of Incorporation/ Declaration of Trust of the Fund.
No interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. The Parties
-----------
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between
-38-
<PAGE>
such individual Fund and the Custodian. With respect to any Fund listed on
Appendix A which is organized as a Massachusetts Business Trust, references to
Board of Directors and Articles of Incorporation shall be deemed a reference to
Board of Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
-----------------------
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
-39-
<PAGE>
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ S. Jane Rose By /s/ Al O'Neal
- ------------------------- --------------------------------
Assistant Secretary
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ------------------------- --------------------------------
Secretary
-40-
<PAGE>
Appendix A
----------
<TABLE>
<CAPTION>
Date of
Fund Name Execution Date Declaration of Trust
- --------- -------------- --------------------
(if applicable)
<S> <C> <C>
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Fund July 1, 1990 June 5, 1981
The BlackRock Government Income Trust August 30, 1991 June 13, 1991
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential Adjustable Rate Securities Fund, Inc. June 1, 1992
Prudential California Municipal Fund August 1, 1990 May 18, 1984
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund, Inc. August 1, 1990
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990 September 22, 1981
Prudential Growth Opportunity Fund, Inc. July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential Jennison Fund, Inc. August 24, 1995
Prudential IncomeVertible Fund, Inc. June 6, 1990
Prudential MoneyMart Assets July 25, 1990
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990 May 18, 1984
Prudential National Municipals Funds, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Short-Term Global Income Fund, Inc. October 25, 1990
Prudential Special Money Market Fund January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Date of
Fund Name Execution Date Declaration of Trust
- --------- -------------- --------------------
(if applicable)
<S> <C> <C>
Prudential Tax-Free Money Fund July 26, 1990
Prudential U.S. Government Fund June 7, 1990 September 22, 1986
Prudential Utility Fund, Inc. June 6, 1990
The Target Portfolio Trust November 9, 1992 July 29, 1992
</TABLE>
<PAGE>
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-9998
(212) 758-9500
June 20, 1996
Prudential Jennison Fund, Inc.
One Seaport Plaza
New York, New York 10292-1025
Ladies and Gentlemen:
We have acted as counsel for Prudential Jennison Fund, Inc. (the "Fund") in
connection with the proposed acquisition by the Fund of all of the assets of
Growth Stock Fund ("Growth Stock Fund"), a series of The Prudential
Institutional Fund ("PIF"), in exchange solely for Class Z shares of the Fund
and the Fund's assumption of all of the liabilities, if any, of Growth Stock
Fund (the "Reorganization"). This opinion is furnished in connection with the
Fund's Registration Statement on Form N-14 under the Securities Act of 1933, as
amended (the "Registration Statement"), relating to Class Z shares of common
stock, par value $0.001 per share, of the Fund (the "Shares"), to be issued in
the Reorganization.
As counsel for the Fund, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale of
the Shares. In addition, we have examined and are familiar with the Articles of
Incorporation of the Fund, as amended and supplemented, the By-Laws of the Fund,
as amended, and such other documents as we have deemed relevant to the matters
referred to in this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization and Liquidation between the
Fund and PIF set forth in the proxy statement and prospectus constituting a part
of the Registration Statement (the "Proxy Statement and Prospectus"), the
Shares, upon issuance in the manner referred to in the Registration Statement,
for consideration not less than the par value thereof, will be legally issued,
fully paid and non-assessable shares of common stock of the Fund.
We are members of the Bar of the State of New York and are not members of
the Bar of, or authorized to practice law in, any other jurisdiction. Insofar
as any opinion expressed herein involves the laws of the State of Maryland, such
opinion should be understood to be based on our review of the published statutes
of such state, and, where applicable, published cases of the courts and rules or
regulations of regulatory bodies of such state.
<PAGE>
Prudential Jennison Fund, Inc.
June 20, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting a part thereof.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
SFH&G:MKN:JHG:PSF:jlk
<PAGE>
June 21, 1996
The Prudential Institutional Fund
21 Prudential Plaza
751 Broad Street
Newark, NJ 07102-3777
Prudential Jennison Fund, Inc.
One Seaport Plaza
New York, NY 10292
Ladies and Gentlemen:
The Prudential Institutional Fund ("Institutional Fund"), on behalf of
Growth Stock Fund, a segregated portfolio of assets ("series") thereof
("Target"), and Prudential Jennison Fund, Inc. ("Acquiring Fund"),/1/ have
requested our opinion as to certain federal income tax consequences of the
proposed acquisition of Target by Acquiring Fund pursuant to an Agreement and
Plan of Reorganization and Liquidation between them. The form of such agreement
and plan ("Plan") is attached as an appendix to the Prospectus and Proxy
Statement to be furnished in connection with the solicitation of proxies by
Institutional Fund's board of trustees for use at a special meeting of Target
shareholders to be held on September 6, 1996 ("Proxy"), included in the
registration statement on Form N-14 to be filed with the Securities and Exchange
Commission ("SEC") on or about the date hereof ("Registration Statement").
Specifically, each Investment Company has requested our opinion:
(1) that the acquisition by Acquiring Fund of Target's assets in exchange
solely for voting shares of common stock in Acquiring Fund and the
assumption by Acquiring Fund of Target's liabilities, followed by the
distribution of those shares by Target pro rata to its shareholders of
record, determined as of the close of business on the Closing Date (as
hereinafter defined) ("Shareholders"), con-
- ------------------
/1/ Target and Acquiring Fund are sometimes referred to herein individually as
a "Fund" and collectively as the "Funds," and Institutional Fund and Acquiring
Fund are sometimes referred to herein individually as an "Investment Company"
and collectively as the "Investment Companies."
<PAGE>
The Prudential Institutional Fund
Prudential Jennison Fund, Inc.
June 21, 1996
Page 2
structively in exchange for their shares of beneficial interest in Target
("Target Shares") (such transaction sometimes being referred to herein as
the "Reorganization"), will constitute a "reorganization" within the
meaning of section 368(a)(1)(C) or (D)/2/ and that each Fund will be a
"party to a reorganization" within the meaning of section 368(b),
(2) that Target, the Shareholders, and Acquiring Fund will recognize no
gain or loss on the Reorganization, and
(3) regarding the basis and holding period after the Reorganization of the
transferred assets and the shares of Acquiring Fund issued pursuant
thereto.
In rendering this opinion, we have examined (1) the Funds' currently
effective prospectuses and statements of additional information, (2) the Proxy,
(3) the Plan, and (4) such other documents as we have deemed necessary or
appropriate for the purposes hereof. As to various matters of fact material to
this opinion, we have relied, exclusively and without independent verification,
on statements of responsible officers of each Investment Company and the
representations described below and made in the Plan (as contemplated in
paragraph 8.6 thereof) (collectively "Representations").
FACTS
-----
Institutional Fund is a business trust organized under the laws of the
State of Delaware; Target is a series thereof. Acquiring Fund is a corporation
organized under the laws of the State of Maryland. Each Investment Company is
registered with the SEC as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act").
Acquiring Fund's shares of common stock are divided into four classes,
designated Class A, Class B, Class C, and Class Z shares; only the Class Z
shares ("Acquiring Fund Shares") are involved in the Reorganization. Target
offers for sale only one class of shares.
On or immediately before the date of the closing of the Reorganization
("Closing"), scheduled for September 20, 1996 (or such later date as to which
the parties may agree in writing) ("Closing Date"), Target will declare and pay
to its shareholders dividends and/or other
- ------------------
/2/ All section references are to the Internal Revenue Code of 1986, as amended
("Code"), and all "Treas. Reg. Section" references are to the regulations
under the Code ("Regulations").
<PAGE>
The Prudential Institutional Fund
Prudential Jennison Fund, Inc.
June 21, 1996
Page 3
distributions so that it will have distributed substantially all (and in any
event not less than 98%) of its investment company taxable income (computed
without regard to any deduction for dividends paid), net tax-exempt interest
income, if any, and realized net capital gains, if any, for all taxable years
through its liquidation.
The Funds' investment objectives and policies are described in the Proxy
and their respective prospectuses and statements of additional information.
Those objectives are identical, and those policies are substantially similar;
the Funds also have the same investment adviser and portfolio manager. The
Funds are approximately equal in size (in terms of net asset value) at the date
hereof.
In considering the Reorganization, each Investment Company's board of
trustees/directors (each a "board") made an extensive inquiry into a number of
factors (which are described in the Proxy, together with a discussion of the
purposes of the Reorganization). Pursuant thereto, each board approved the
Plan, subject to approval of Target's shareholders. In doing so, each board,
including a majority of its members who are not "interested persons" (as that
term is defined in the 1940 Act) of either Investment Company, determined that
the Reorganization is in its Fund's best interests and that its Fund's
shareholders' interests will not be diluted as a result of the Reorganization.
The Plan, which specifies that it is intended to be, and is adopted as, a
plan of a reorganization described in section 368(a)(1), provides in relevant
part for the following:
(1) The acquisition by Acquiring Fund of all cash, cash equivalents,
securities, receivables (including interest and dividends receivable), and
other property of any kind owned by Target and any deferred and prepaid
expenses shown as assets on Target's books on the Closing Date
(collectively "Assets"), in exchange solely for
(a) the number of Acquiring Fund Shares determined by dividing
the net asset value of Target by the net asset value of an Acquiring
Fund Share, and
(b) Acquiring Fund's assumption of all of Target's debts,
liabilities, obligations, and duties of whatever kind or nature,
whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not
determinable as of the Closing Date, and whether or not specifically
referred to in the Plan (collectively "Liabilities") (Target
<PAGE>
The Prudential Institutional Fund
Prudential Jennison Fund, Inc.
June 21, 1996
Page 4
having agreed in the Plan to utilize its best efforts to discharge all
of its known Liabilities prior to the Closing Date),
(2) The constructive distribution of such Acquiring Fund Shares to
the Shareholders, and
(3) The subsequent liquidation of Target.
The distribution described in (2) will be accomplished by transferring the
Acquiring Fund Shares then credited to Target's account on Acquiring Fund's
share transfer records to accounts on those records established in the
Shareholders' names, with each Shareholder's account being credited with the
respective pro rata number of full and fractional (rounded to three decimal
places) Acquiring Fund Shares due such Shareholder.
REPRESENTATIONS
---------------
The representations enumerated below have been made to us by appropriate
officers of each Investment Company.
Each of Institutional Fund, on behalf of Target, and Acquiring Fund has
represented and warranted to us as follows:
1. The fair market value of the Acquiring Fund Shares, when received by
the Shareholders, will be approximately equal to the fair market value of their
Target Shares constructively surrendered in exchange therefor;
2. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
3. The fair market value on a going concern basis of the Assets will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those to
which the Assets are subject;
4. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
5. Pursuant to the Reorganization, Target will transfer to Acquiring
Fund, and Acquiring Fund will acquire, at least 90% of the fair market value of
the net assets, and
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June 21, 1996
Page 5
at least 70% of the fair market value of the gross assets, held
by Target immediately before the Reorganization. For the purposes of this
representation, any amounts used by Target to pay its Reorganization expenses
and redemptions and distributions made by it immediately before the
Reorganization (except for (a) distributions made to conform to its policy of
distributing all or substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax under section 4982
and (b) redemptions not made as part of the Reorganization) will be included as
assets thereof held immediately before the Reorganization; and
6. None of the compensation received by any Shareholder who is an
employee of Target will be separate consideration for, or allocable to, any of
the Target Shares held by such Shareholder-employee; none of the Acquiring Fund
Shares received by any such Shareholder-employee will be separate consideration
for, or allocable to, any employment agreement; and the consideration paid to
any such Shareholder-employee will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services.
Institutional Fund also has represented and warranted to us on behalf of
Target as follows:
1. There is no plan or intention of Shareholders who own 5% or more of the
Target Shares -- and, to the best of its management's knowledge, there is no
plan or intention of the remaining Shareholders -- to redeem or otherwise
dispose of a number of the Acquiring Fund Shares to be received by them in the
Reorganization that would reduce the Shareholders' ownership of Acquiring Fund
Shares to a number of shares having a value, as of the Closing Date, of less
than 50% of the value of all the formerly outstanding Target Shares as of that
date. Target Shares and Acquiring Fund Shares held by Shareholders and redeemed
or otherwise disposed of before or after the Reorganization will be taken into
account for these purposes;
2. The Liabilities were incurred by Target in the ordinary course of its
business;
3. Target is a "fund" as defined in section 851(h)(2); it qualified for
treatment as a regulated investment company ("RIC") under Subchapter M of the
Code ("Subchapter M") for each past taxable year since it commenced operations
and will continue to meet all the requirements for such qualification for its
current taxable year; and it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M did not apply to it;
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June 21, 1996
Page 6
4 Target is not under the jurisdiction of a court in a proceeding under
Title 11 of the United States Code or similar case within the meaning of section
368(a)(3)(A);
5. Not more than 25% of the value of Target's total assets (excluding
cash, cash items, and U.S. government securities) is invested in the stock and
securities of any one issuer, and not more than 50% of the value of such assets
is invested in the stock and securities of five or fewer issuers;
6. Immediately before the Reorganization, Target will not own any asset
as to which any unrealized gain or loss may be required to be recognized for
federal income tax purposes at the end of a taxable year (or on the termination
or transfer thereof) under a mark-to-market system of accounting; and
7. Target will be terminated as soon as reasonably practicable after the
Reorganization, but in all events within six months after the Closing Date.
Acquiring Fund also has represented and warranted to us as follows:
1. No consideration other than Acquiring Fund Shares (and Acquiring Fund's
assumption of the Liabilities) will be issued in exchange for the Assets in the
Reorganization;
2. Acquiring Fund qualified for treatment as a RIC under Subchapter M for
each past taxable year since it commenced operations and will continue to meet
all the requirements for such qualification for its current taxable year; it
intends to continue to meet all such requirements for the next taxable year; and
it has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
3. Acquiring Fund has no plan or intention to issue additional Acquiring
Fund Shares following the Reorganization except for shares issued in the
ordinary course of its business as an open-end investment company; nor does it
have any plan or intention to redeem or otherwise reacquire any Acquiring Fund
Shares issued to the Shareholders pursuant to the Reorganization, other than
through redemptions arising in the ordinary course of that business;
4. Following the Reorganization, Acquiring Fund will continue Target's
historic business;
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June 21, 1996
Page 7
5. There is no plan or intention for Acquiring Fund to be dissolved or
merged into another corporation or business trust or any "fund" thereof (within
the meaning of section 851(h)(2)) following the Reorganization;
6. Immediately after the Reorganization, (a) not more than 25% of the
value of Acquiring Fund's total assets (excluding cash, cash items, and U.S.
government securities) will be invested in the stock and securities of any one
issuer and (b) not more than 50% of the value of such assets will be invested in
the stock and securities of five or fewer issuers; and
7. Acquiring Fund does not own, directly or indirectly, nor at the
Closing Date will it own, directly or indirectly, nor has it owned, directly or
indirectly, at any time during the past five years, any shares of Target.
OPINION
-------
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of Closing and (2) the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets in exchange solely for the
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities,
followed by Target's distribution of those shares pro rata to the Shareholders
constructively in exchange for their Target Shares, will constitute a
reorganization within the meaning of section 368(a)(1)(C) or (D), and each fund
will be "a party to a reorganization" within the meaning of section 368(b);
2. No gain or loss will be recognized to Target on the transfer of the
Assets to Acquiring Fund in exchange solely for the Acquiring Fund Shares and
Acquiring Fund's assumption of the Liabilities or on the subsequent distribution
of those shares to the Shareholders in constructive exchange for their Target
Shares (sections 361 and 357(a));
3. No gain or loss will be recognized to Acquiring Fund on its receipt of
the Assets in exchange solely for the Acquiring Fund Shares and its assumption
of the Liabilities (section 1032(a));
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June 21, 1996
Page 8
4. Acquiring Fund's basis for the Assets will be the same as the basis
thereof in Target's hands immediately before the Reorganization (section
362(b)), and Acquiring Fund's holding period for the Assets will include
Target's holding period therefor (section 1223(2));
5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares pursuant to
the Reorganization (section 354(a)); and
6. A Shareholder's basis for the Acquiring Fund Shares to be received by
it in the Reorganization will be the same as the basis for its Target Shares to
be constructively surrendered in exchange for those Acquiring Fund Shares
(section 358(a)), and its holding period for those Acquiring Fund Shares will
include its holding period for those Target Shares, provided they are held as
capital assets by the Shareholder on the Closing Date (section 1223(1)).
The foregoing opinion (1) is based on, and is conditioned on the continued
applicability of, the provisions of the Code and the Regulations, judicial
decisions, and rulings and other pronouncements of the Internal Revenue Service
("Service") in existence on the date hereof and (2) is applicable only to the
extent each Fund is solvent. We express no opinion about the tax treatment of
the transactions described herein if either Fund is insolvent.
ANALYSIS
--------
I. The Reorganization Will Be a Reorganization under Section 368(a)(1)(C) or
-------------------------------------------------------------------------
(D), and Each Fund Will Be a Party to a Reorganization.
------------------------------------------------------
A. Each Fund Is a Separate Corporation.
-----------------------------------
A reorganization under section 368(a)(1)(C) (a "C reorganization") involves
the acquisition by one corporation, in exchange solely for all or a part of its
voting stock, of substantially all of the properties of another corporation. A
reorganization under section 368(a)(1)(D) (a "D reorganization") involves a
transfer by a corporation of all or a part of its assets to another corporation
if immediately after the transfer the transferor, or one or more of its
shareholders (including persons who were shareholders immediately before the
transfer), or any combination thereof, is in control of the transferee
corporation; but only if, in pursuance of the plan, stock or securities of the
transferee corporation are distributed in a transaction that qualifies under
<PAGE>
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Prudential Jennison Fund, Inc.
June 21, 1996
Page 9
section 354, 355, or 356./3/ For a transaction to qualify as a C or D
reorganization, therefore, both entities involved therein must be corporations
(or associations taxable as corporations). Institutional Fund, however, is a
Delaware business trust, not a corporation, and Target is a separate series
thereof.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees for
the benefit of beneficiaries) will not be classified as trusts for purposes of
the Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. These "business or commercial trusts" are
created simply as devices to carry on profit-making businesses that normally
would have been carried on through corporations or partnerships. Treasury
Regulation section 301.7701-4(c) further provides that an "`investment' trust
will not be classified as a trust if there is a power under the trust agreement
to vary the investment of the certificate holders." See Commissioner v. North
--- ---------------------
American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701
- ------------------- ------------
(1942).
Based on these criteria, Institutional Fund does not qualify as a trust for
federal income tax purposes. While Institutional Fund is an "investment trust,"
it does not have a fixed pool of assets -- Target (as well as each other series
thereof) has been a managed portfolio of securities, and its investment adviser
has had the authority to buy and sell securities for it. Institutional Fund is
not simply an arrangement to protect or conserve property for the beneficiaries,
but it is designed to carry on a profit-making business. In addition, the word
"association" has long been held to include a Massachusetts business trust (see
---
Hecht v. Malley, 265 U.S. 144 (1924)), which for these purposes has similar
- ---------------
characteristics to a Delaware business trust, such as Institutional Fund.
Accordingly, we believe that Institutional Fund will be treated as a corporation
for federal income tax purposes.
Institutional Fund as such, however, is not participating in the
Reorganization, but rather a series thereof (Target) is the participant.
Ordinarily, a transaction involving a segregated pool
- -----------------------
/3/ In the case of a transaction such as the Reorganization, the term
"control," as used in section 368(a)(1)(D), means ownership of stock possessing
at least 50% of the total combined voting power of all classes of stock entitled
to vote or at least 50% of the total value of shares of all classes of stock.
See sections 368(a)(2)(H) and 304(c). Because the respective net asset values
- ---
of the Funds are approximately equal at the date hereof, it is unclear whether
the Shareholders will be in control (as so defined) of Acquiring Fund
immediately after the Reorganization. Accordingly, the analysis herein
discusses the requirements and consequences of both a C reorganization (which
would result if the Shareholders were not in such control) and a D
reorganization.
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The Prudential Institutional Fund
Prudential Jennison Fund, Inc.
June 21, 1996
Page 10
of assets such as Target could not qualify as a reorganization, because the pool
would not be a corporation. Under section 851(h), however, Target is treated as
a separate corporation for all purposes of the Code save the definitional
requirement of section 851(a) (which is satisfied by Institutional Fund). Thus,
we believe that Target will be a separate corporation, and its shares will be
treated as shares of corporate stock, for purposes of section 368(a)(1).
B. Satisfaction of Section 368(a)(2)(F).
------------------------------------
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (other than subparagraph (E) thereof) are
"investment companies," the transaction will not be considered a reorganization
with respect to any such investment company or its shareholders unless, among
other things, the investment company is a RIC or --
(1) not more than 25% of the value of its total assets is invested in the
stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is invested in the
stock and securities of five or fewer issuers.
Each Fund will meet the requirements for qualification and treatment as a RIC
for its respective current taxable year, and the foregoing percentage tests will
be satisfied by each Fund. Accordingly, we believe that section 368(a)(2)(F)
will not cause the Reorganization to fail to qualify as a C or D reorganization
with respect to either Fund.
C. Transfer of "Substantially All" of the Properties.
-------------------------------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all" of the properties of the transferor
corporation solely in exchange for all or part of the acquiring corporation's
stock. Section 354(b)(1)(A) provides that, for an exchange in pursuance of a
plan of a D reorganization to receive tax-free treatment under section 354 (see
V below), the acquiring corporation must acquire "substantially all" of the
assets of the transferor corporation. For purposes of issuing private letter
rulings, the Service considers the transfer of at least 70% of the transferor's
gross assets, and at least 90% of its net assets, held immediately before the
reorganization to satisfy the "substantially all" requirement. Rev. Proc. 77-
37, 1977-2 C.B. 568. The Reorganization will involve such a transfer.
Accordingly, we believe that the Reorganization will involve the transfer to
Acquiring Fund of substantially all of Target's properties.
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June 21, 1996
Page 11
D. Qualifying Consideration.
------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the transferor's
property solely in exchange for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally are disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Because
Acquiring Fund will exchange only the Acquiring Fund Shares, and no money or
other property, for the Assets, we believe that the Reorganization will satisfy
the solely-for-voting-stock requirement.
E. Requirements of Continuity.
--------------------------
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to a
valid reorganization: (1) a continuity of the business enterprise under the
modified corporate form ("continuity of business") and (2) a continuity of
interest therein on the part of those persons who, directly or indirectly, were
the owners of the enterprise prior to the reorganization ("continuity of
interest").
1. Continuity of Business.
----------------------
The continuity of business enterprise test as set forth in Treas. Reg.
Section 1.368-1(d)(2) requires that the acquiring corporation must either (i)
continue the acquired corporation's historic business ("business continuity") or
(ii) use a significant portion of the acquired corporation's historic business
assets in a business ("asset continuity").
While there is no authority that deals directly with the requirement of
continuity of business in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
securities. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C reorganization. Prior to the
exchange, T sold its entire portfolio of corporate securities and purchased a
portfolio of municipal securities. The Service held that this transaction did
not qualify as a reorganization for the following reasons: (1) because T had
sold its historic assets prior to the exchange, there was no asset continuity;
and (2) the failure of P to engage in the business of investing in corporate
securities after the exchange caused the transaction to lack business continuity
as well.
<PAGE>
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June 21, 1996
Page 12
The Funds' investment objectives are identical, their investment policies
are substantially similar, and they have the same investment adviser and
portfolio manager. Following the Reorganization, Acquiring Fund will continue
Target's historic business. Accordingly, we believe that the Reorganization
will meet the continuity of business requirement.
2. Continuity of Interest.
----------------------
For purposes of issuing private letter rulings, the Service considers the
continuity of interest requirement of Treas. Reg. (S) 1.368-1(b) satisfied if
ownership in an acquiring corporation on the part of a transferor corporation's
former shareholders is equal in value to at least 50% of the value of all the
formerly outstanding shares of the transferor corporation. Rev. Proc. 77-37,
supra; but see Rev. Rul. 56-345, 1956-2 C.B. 206 (continuity of interest was
- ----- --- ---
held to exist in a reorganization of two RICs where immediately after the
reorganization 26% of the shares were redeemed in order to allow investment in a
third RIC); also see Reef Corp. v. Commissioner, 368 F.2d 125 (5th Cir. 1966),
---- --- --------------------------
cert. denied, 386 U.S. 1018 (1967) (a redemption of 48% of a transferor
- ------------
corporation's stock was not a sufficient shift in proprietary interest to
disqualify a transaction as a reorganization under section 368(a)(2)(F) ("F
Reorganization"), even though only 52% of the transferor's shareholders would
hold all the transferee's stock); Aetna Casualty and Surety Co. v. U.S., 568
-------------------------------------
F.2d 811, 822-23 (2d Cir. 1976) (redemption of a 38.39% minority interest did
not prevent a transaction from qualifying as an F Reorganization); Rev. Rul. 61-
156, 1961-2 C.B. 62 (a transaction qualified as an F Reorganization even though
the transferor's shareholders acquired only 45% of the transferee's stock, while
the remaining 55% of that stock was issued to new shareholders in a public
underwriting immediately after the transfer). No minimum holding period for
shares of an acquiring corporation is imposed under the Code on the acquired
corporation's shareholders.
A preconceived plan or arrangement by or among an acquired corporation's
shareholders to dispose of more than 50% of an acquiring corporation's shares
could be problematic. Shareholders with no such preconceived plan or
arrangement, however, are basically free to sell any part of the shares received
by them in the reorganization without fear of breaking continuity of interest,
because the subsequent sale will be treated as an independent transaction from
the reorganization.
There is no plan or intention of Shareholders who own 5% or more of the
Target Shares -- and, to the best of Target's knowledge, there is no plan or
intention of the remaining Shareholders -- to redeem or otherwise dispose of a
number of the Acquiring Fund Shares to be received by them in the Reorganization
that would reduce the Shareholders' ownership of Acquiring Fund Shares to a
number of shares having a value, as of the Closing Date, of less than 50% of the
value of all the formerly outstanding Target Shares as of that date; Target
<PAGE>
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June 21, 1996
Page 13
Shares and Acquiring Fund Shares held by Shareholders and redeemed or otherwise
disposed of before or after the Reorganization will be taken into account for
these purposes. Accordingly, we believe that the Reorganization will meet the
continuity of interest requirement of Treas. Reg. (S) 1.368-1(b).
F. Distribution by Target.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as a C
reorganization unless the corporation whose properties are acquired distributes
the stock it receives and its other property in pursuance of the plan of
reorganization. Under the Plan -- which we believe constitutes a "plan of
reorganization" within the meaning of Treas. Reg. (S) 1.368-2(g) -- Target will
distribute all the Acquiring Fund Shares to its shareholders in constructive
exchange for their Target Shares; as soon as is reasonably practicable
thereafter, Target will be terminated. Accordingly, we believe that the
requirements of section 368(a)(2)(G)(i) will be satisfied.
As previously noted, a transfer of assets by one corporation to another
corporation will qualify as a D reorganization only if (1) immediately after the
transfer the transferor, or one or more of its shareholders (including persons
who were shareholders immediately before the transfer), or any combination
thereof, is in control of the transferee corporation and (2) pursuant to the
plan, stock or securities of the transferee corporation are distributed in a
transaction that qualifies under section 354, among others (and, pursuant to
section 354(b)(1)(B), all such stock or securities, as well as the transferor's
other properties, are distributed pursuant to the plan). For purposes of clause
(1), as applicable here (see sections 368(a)(2)(H) and 304(c)(1)), "control" is
---
defined as the ownership of stock possessing at least 50% of the total combined
voting power of all classes of stock entitled to vote or at least 50% of the
total value of shares of all classes of stock; if the Shareholders will be in
control (as so defined) of Acquiring Fund immediately after the Reorganization
(see note 3 above), the control requirement for a D reorganization will be
- ----
satisfied. With respect to clause (2), Target will distribute all the Acquiring
Fund Shares to the Shareholders pursuant to the Plan (which, as noted above, we
believe constitutes a "plan of reorganization"), which distribution we believe
will qualify under section 354(a) (see V. below). Accordingly, we believe that
the distribution requirement for a D reorganization will be satisfied.
G. Business Purpose.
----------------
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in Gregory v. Helvering, 293
--------------------
U.S. 465 (1935), and is now set forth in Treas. Reg. (S)(S) 1.368-1(b), -1(c),
and -2(g) (the last of which provides that, to qualify as a reorganization, a
transaction must be "undertaken for reasons germane to the con-
<PAGE>
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Prudential Jennison Fund, Inc.
June 21, 1996
Page 14
tinuance of the business of a corporation a party to the reorganization"). Under
that doctrine, a transaction must have a bona fide business purpose (and not a
purpose to avoid federal income tax) to constitute a valid reorganization. The
substantial business purposes of the Reorganization are described in the Proxy.
Accordingly, we believe that the Reorganization is being undertaken for bona
fide business purposes (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
For all the foregoing reasons, we believe that the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1)(C) or (D).
H. Both Funds are Parties to the Reorganization.
--------------------------------------------
Section 368(b)(2) and Treas. Reg. (S) 1.368-1(f) provide that if one
corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization. Target is
transferring substantially all of its properties to Acquiring Fund in exchange
for Acquiring Fund Shares. Accordingly, we believe that each Fund will be "a
party to a reorganization."
II. No Gain or Loss Will Be Recognized to Target.
--------------------------------------------
Under sections 361(a) and (c), no gain or loss will be recognized to a
corporation that is a party to a reorganization (1) on the exchange of property,
pursuant to the plan of reorganization, solely for stock or securities in
another corporate party to the reorganization or (2) on the distribution to its
shareholders, pursuant to that plan, of stock in such other corporation that was
received by the distributing corporation in the exchange. (Such a distribution
is required by section 368(a)(1)(D) and (2)(G)(i) for a reorganization to
qualify as a D or C reorganization, respectively.) Section 361(c)(4) provides
that specified provisions requiring recognition of gain on certain distributions
shall not apply to a distribution described in (2) above.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a bona fide
business purpose.
<PAGE>
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Prudential Jennison Fund, Inc.
June 21, 1996
Page 15
As noted above, the Reorganization will constitute a C or D reorganization,
each Fund will be a party to a reorganization, and the Plan constitutes a plan
of reorganization. Target will exchange the Assets solely for the Acquiring
Fund Shares and Acquiring Fund's assumption of the Liabilities and then will be
terminated pursuant to the Plan, distributing those shares to its shareholders
in constructive exchange for their Target Shares. As also noted above, we
believe that the Reorganization is being undertaken for bona fide business
purposes (and not a purpose to avoid federal income tax); we also do not believe
that the principal purpose of Acquiring Fund's assumption of the Liabilities is
avoidance of federal income tax on the proposed transaction. Accordingly, we
believe that no gain or loss will be recognized to Target on the Reorganization.
III. No Gain or Loss Will Be Recognized to Acquiring Fund.
----------------------------------------------------
Section 1032(a) provides that no gain or loss will be recognized to a
corporation on the receipt by it of money or other property in exchange for its
shares. Acquiring Fund will issue the Acquiring Fund Shares to Target in
exchange for the Assets, which consist of money and securities. Accordingly, we
believe that no gain or loss will be recognized to Acquiring Fund on the
Reorganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis, and Its
------------------------------------------------------------------------
Holding Period Will Include Target's Holding Period.
---------------------------------------------------
Section 362(b) provides that property acquired by a corporation in
connection with a reorganization will have the same basis in that corporation's
hands as the basis of the property in the transferor corporation's hands
immediately before the exchange, increased by any gain recognized to the
transferor on the transfer. As noted above, the Reorganization will constitute
a C or D reorganization and Target will recognize no gain on the Reorganization
under section 361(a). Accordingly, we believe that Acquiring Fund's basis for
the Assets will be the same as the basis thereof in Target's hands immediately
before the Reorganization.
Section 1223(2) provides that where property acquired in an exchange has a
carryover basis, the property will have a holding period in the hands of the
acquiror that includes the holding period of the property in the transferor's
hands. As stated above, Acquiring Fund's basis for the Assets will be a
carryover basis. Accordingly, we believe that Acquiring Fund's holding period
for the Assets will include Target's holding period therefor.
<PAGE>
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June 21, 1996
Page 16
V. No Gain or Loss Will Be Recognized to a Shareholder.
---------------------------------------------------
Under section 354(a), no gain or loss is recognized to a shareholder who
exchanges shares for other shares pursuant to a plan of reorganization, where
the shares exchanged, as well as the shares received, are those of a corporation
that is a party to the reorganization. As stated above, the Reorganization will
constitute a C or D reorganization (and in the latter case the requirements of
section 354(b)(1)(A) and (B) will be satisfied), the Plan constitutes a plan of
reorganization, and each Fund will be a party to a reorganization. Accordingly,
we believe that under section 354 a Shareholder will recognize no gain or loss
on the constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization.
VI. A Shareholder's Basis for Acquiring Fund Shares Will Be a Substituted
---------------------------------------------------------------------
Basis, and its Holding Period therefor Will Include its Holding Period for
--------------------------------------------------------------------------
its Target Shares.
-----------------
Section 358(a)(1) provides, in part, that in the case of an exchange to
which section 354 applies, the basis of any shares received in the transaction
without the recognition of gain is the same as the basis of the property
transferred in exchange therefor, decreased by, among other things, the fair
market value of any other property and the amount of any money received in the
transaction and increased by the amount of any gain recognized on the exchange
by the shareholder.
As noted above, the Reorganization will constitute a C or D reorganization
and under section 354 no gain or loss will be recognized to a Shareholder on the
constructive exchange of its Target Shares for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
the Acquiring Fund Shares, and no money will be distributed to them pursuant to
the Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares to be received by it in the Reorganization will be the
same as the basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares.
Under section 1223(1), the holding period of property received in an
exchange includes the holding period of the property exchanged therefor if the
acquired property has, for the purpose of determining gain or loss, the same
basis in the holder's hands as the property exchanged therefor ("substituted
basis") and such property was a capital asset. As noted above, a Shareholder
will have a substituted basis for the Acquiring Fund Shares it receives in the
Reorganization; accordingly, provided that the Shareholder held its Target
Shares as capital assets on the Closing Date, we believe its holding period for
those Acquiring Fund Shares will include its holding period for those Target
Shares.
<PAGE>
The Prudential Institutional Fund
Prudential Jennison Fund, Inc.
June 21, 1996
Page 17
We hereby consent to this opinion accompanying the Registration Statement
and to the references to our firm under the captions "Synopsis -- Federal Income
Tax Consequences of the Proposed Reorganization" and "The Proposed Transaction -
- - Federal Income Tax Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
---------------------------
Theodore L. Press
<PAGE>
EXHIBIT 13(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL JENNISON FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Article 1 Terms of Appointment; Duties of the Agent .............. 1
Article 2 Fees and Expenses....................................... 5
Article 3 Representations and Warranties of the Agent............. 5
Article 4 Representations of Warranties of the Fund............... 6
Article 5 Duty of Care and Indemnification........................ 7
Article 6 Documents and Covenants of the Fund and the Agent....... 10
Article 7 Termination of Agreement................................ 12
Article 8 Assignment.............................................. 12
Article 9 Affiliations............................................ 13
Article 10 Amendment............................................... 14
Article 11 Applicable Law.......................................... 14
Article 12 Miscellaneous........................................... 14
Article 13 Merger of Agreement..................................... 15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 27th day of October, 1995 by and between
PRUDENTIAL JENNISON FUND, INC., a Maryland corporation, having its principal
office and place of business at One Seaport Plaza, New York, New York 10292
(the Fund), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey
corporation, having its principal office and place of business at Raritan Plaza
One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
------------------------------------
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of the
common stock of each series of the Fund, $.001 par value (Shares), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof (Shareholders) and set out in the currently
effective prospectus and statement of additional
<PAGE>
information (prospectus) of the Fund, including without limitation any periodic
investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following
services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the
Custodian of the Fund authorized pursuant to the Articles of Incorporation of
the Fund (the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges
2
<PAGE>
may be reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant
to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a
record of the total number of Shares of the Fund which are authorized, based
upon data provided to it by the Fund, and issued and outstanding. PMFS shall
also provide to the Fund on a regular basis the total number of Shares which
are authorized, issued and outstanding and shall notify the Fund in case any
proposed issue of Shares by the Fund would result in an overissue. In case any
issue of Shares would result in an overissue, PMFS shall refuse to issue such
Shares and shall not countersign and issue any certificates requested for such
Shares. When recording the issuance of Shares, PMFS shall have no obligation
to take cognizance of any Blue Sky laws relating to the issue or sale of such
Shares, which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), PMFS shall: (i) perform all of the customary services of
a transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing
3
<PAGE>
proxies, receiving and tabulating proxies, mailing Shareholder reports and
prospectuses to current Shareholders, withholding taxes on non-resident alien
accounts, preparing and filing appropriate forms required with respect to
dividends and distributions by federal tax authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders and providing Shareholder account information and (ii) provide
a system which will enable the Fund to monitor the total number of Shares sold
in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for
each State and (ii) verify the establishment of transactions for each State on
the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of PMFS for the Fund's registration status
under the Blue Sky or securities laws of any State or other jurisdiction is
solely limited to the initial establishment of transactions subject to Blue Sky
compliance by the Fund and the reporting of such transactions to the Fund as
provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
4
<PAGE>
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
-----------------
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the
Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred
by PMFS for the items set out in Schedule A attached hereto. In addition, any
other expenses incurred by PMFS at the request or with the consent of the Fund
will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the
Fund upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
--------------------------------------
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing
5
<PAGE>
and in good standing under the laws of New Jersey and it is duly qualified to
carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities
and Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements
of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act
6
<PAGE>
of 1933 (the 1933 Act) is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
--------------------------------
5.01 PMFS shall not be responsible for, and the Fund shall
indemnify and hold PMFS harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of
or attributable to:
(a) All actions of PMFS or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii)
have been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
7
<PAGE>
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky laws
of any State or other jurisdiction that such Shares be registered in such State
or other jurisdiction or in violation of any stop order or other determination
or ruling by any federal agency or any State or other jurisdiction with respect
to the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by PMFS as a result of PMFS' lack of good faith, negligence or
willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or
8
<PAGE>
subcontractors by machine readable input, telex, CRT data entry or other
similar means authorized by the Fund, and shall not be held to have notice of
any change of authority of any person, until receipt of written notice thereof
from the Fund. PMFS, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signature of the officers of the Fund, and
the proper countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment
or transmission failure or damage reasonably beyond its control, or other
causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for
any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate
9
<PAGE>
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
--------------------------------------------
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of
the Fund authorizing the appointment of PMFS and the execution and delivery of
this Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the
1933 Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary of the
Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems
to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for
10
<PAGE>
safekeeping of stock certificates, check forms and facsimile signature
imprinting devices, if any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To
the extent required by Section 31 of the 1940 Act, and the Rules and
Regulations thereunder, PMFS agrees that all such records prepared or
maintained by PMFS relating to the services to be performed by PMFS hereunder
are the property of the Fund and will be preserved, maintained and made
available in accordance with such Section 31 of the 1940 Act, and the Rules and
Regulations thereunder, and will be surrendered promptly to the Fund on and in
accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement
shall remain confidential and shall not be voluntarily disclosed to any other
person except as may be required by law or with the prior consent of PMFS and
the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable
11
<PAGE>
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
----------
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further
consent by the Fund, subcontract, in whole or in part, for the performance of
its obligations and duties hereunder with any person or entity including but
not limited to: (i) Prudential Securities Incorporated (Prudential
Securities), a registered broker-dealer, (ii) The Prudential Insurance Company
of America (Prudential), (iii) Pruco Securities Corporation, a registered
broker-dealer, (iv) any Prudential Securities or Prudential subsidiary or
affiliate duly registered as a broker-dealer and/or
12
<PAGE>
a transfer agent pursuant to the 1934 Act or (vi) any other Prudential
Securities or Prudential affiliate or subsidiary; provided, however, that PMFS
shall be as fully responsible to the Fund for the acts and omissions of any
agent or subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
------------
9.01 PMFS may now or hereafter, without the consent of or notice
to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for
any other investment company registered with the SEC under the 1940 Act,
including without limitation any investment company whose adviser,
administrator, sponsor or principal underwriter is or may become affiliated
with Prudential Securities and/or Prudential or any of its or their direct or
indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees,
agents, shareholders or otherwise.
13
<PAGE>
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution
of the Board of Directors of the Fund.
Article 11 Applicable Law
--------------
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
Jersey.
Article 12 Miscellaneous
-------------
12.01 In the event of an alleged loss or destruction of any
Share certificate, no new certificate shall be issued in lieu thereof, unless
there shall first be furnished to PMFS an affidavit of loss or non-receipt by
the holder of Shares with respect to which a certificate has been lost or
destroyed, supported by an appropriate bond satisfactory to PMFS and the Fund
issued by a surety company satisfactory to PMFS, except that PMFS may accept an
affidavit of loss and indemnity agreement executed by the registered holder (or
legal representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate,
in cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of
money on the account of any Shareholder or new investor is returned unpaid for
any reason, PMFS will (a) give prompt notification to the Fund's distributor
(Distributor) of such non-payment; and (b) take such other action, including
imposition
14
<PAGE>
of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Fund and the Distributor may instruct
PMFS.
12.03 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to PMFS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
Prudential Jennison Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
-------------------
13.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in their names and on their behalf under their seals by and
through their duly authorized officers, as of the day and year first above
written.
PRUDENTIAL JENNISON FUND, INC.
BY: /s/ Robert F. Gunia
---------------------------
Robert F. Gunia
Vice President
ATTEST:
/s/ Eugene S. Stark
- -----------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Vincent Marra
---------------------------
Vincent Marra
ATTEST:
/s/ S. Jane Rose
- -----------------------------
16
<PAGE>
SCHEDULE A
17
<PAGE>
SCHEDULE B
18
<PAGE>
EXHIBIT 14
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form N-14 of Prudential
Jennison Fund, Inc. of our reports on the financial statements of Prudential
Jennison Fund, Inc. dated September 14, 1995 and The Prudential Institutional
Fund dated November 16, 1995 (the "Portfolios"), which are incorporated by
reference in and are a part of such Registration Statement, and to the
references to us under the headings "Financial Highlights" in the Prospectus of
each of the Portfolios, which are incorporated by reference in and/or are a part
of such Registration Statement, and "Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants" in the Statement of Additional Information of
each of the Portfolios, which are incorporated by reference in and/or are a part
of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
June 21, 1996
<PAGE>
EXHIBIT 17(a)
PROXY
THE PRUDENTIAL INSTITUTIONAL FUND--GROWTH STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned hereby appoints S. Jane Rose, Marguerite E.H. Morrison and
Eugene S. Stark as Proxies, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of The Prudential Institutional Fund--Growth Stock Fund, held of record
by the undersigned on July 12, 1996, at the Special Meeting of Shareholders to
be held on September 6, 1996, or any adjournment thereof.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation
[_] APPROVE [_] DISAPPROVE [_]ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(over)
<PAGE>
LOGO
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership.
please sign in partnership
name by authorized person.
Dated _________________ , 1996
------------------------------
Signature
------------------------------
Signature if held jointly
<PAGE>
EXHIBIT 99.17(b)
As filed with the Securities and Exchange Commission
on August 22, 1995
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1940 [X]
AMENDMENT NO. [ ]
(Check appropriate box or boxes)
PRUDENTIAL JENNISON FUND, INC.
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
*Registrant hereby elects, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, to register an indefinite number of shares by this
Registration Statement. In accordance with Rule 24f-2, a registration fee, in
the amount of $500, is being paid herewith.
Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
EXHIBIT 17(c)
Prudential Jennison Fund, Inc.
(Class Z Shares)
- -------------------------------------------------------------------------------
PROSPECTUS DATED APRIL 15, 1996
- -------------------------------------------------------------------------------
Prudential Jennison Fund, Inc. (the Fund) is an open-end, diversified manage-
ment investment company whose objective is long-term growth of capital. The
Fund seeks to achieve this objective by investing primarily in equity securi-
ties (common stock, preferred stock and securities convertible into common
stock) of established companies with above-average growth prospects. Current
income, if any, is incidental. Under normal market conditions, the Fund in-
tends to invest at least 65% of its total assets in equity securities of com-
panies that exceed $1 billion in market capitalization. The Fund may also in-
vest in (i) equity securities of other companies including foreign issuers,
(ii) investment grade fixed-income securities and (iii) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, includ-
ing mortgage-backed securities. The Fund may engage in various derivative se-
curities transactions, such as options on stocks, stock indices and foreign
currencies, foreign currency exchange contracts and the purchase and sale of
futures contracts on stock indices and options thereon to hedge its portfolio
and to attempt to enhance return. 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 One Seaport Plaza, New York,
New York 10292, and its telephone number is (800) 225-1852.
The Fund is not intended to constitute a complete investment program. Because
of its objectives and policies and its emphasis on growth stocks, the Fund may
be considered subject to greater investment risks than are assumed by certain
other investment companies.
Class Z shares are offered exclusively for sale to participants in the PSI
401(k) Plan, an employee benefit plan sponsored by Prudential Securities In-
corporated (the PSI 401(k) Plan or the Plan). Only Class Z shares are offered
through this Prospectus. The Fund also offers Class A, Class B and Class C
shares through the attached Prospectus dated October 27, 1995 (as supplemented
April 15, 1996) (the Retail Class Prospectus), which is a part hereof.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated October 27, 1995 (as supplemented
April 15, 1996), which information is incorporated herein by reference (is le-
gally considered a part of this Prospectus) and is available without charge
upon request to the Fund, at the address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS Z SHARES
--------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................... None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends..................................................... None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower)................... None
Redemption Fees................................................ None
Exchange Fee................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS Z SHARES
(as a percentage of average net assets) --------------
<S> <C>
Management Fees................................................ .60%
12b-1 Fees..................................................... None
Other Expenses................................................. .52%
---
Total Fund Operating Expenses.................................. 1.12%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming
(1) 5% annual return and (2) redemption at the end of each
time period:
Class Z.................................................. $11 $36
</TABLE>
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 Class Z shares of
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" include estimated operating expenses of the
Fund, for the fiscal year ending September 30, 1996, such as Directors'
and professional fees, registration fees, reports to shareholders,
transfer agency and custodian (domestic and foreign) fees (but excludes
foreign withholding taxes).
2
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR"
IN THE RETAIL CLASS PROSPECTUS:
Prudential Securities serves as the Distributor of Class Z shares and incurs
the expenses of distributing the Fund's Class Z shares under a Distribution
Agreement with the Fund, none of which are reimbursed by or paid for by the
Fund.
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND VALUES ITS SHARES" IN
THE RETAIL CLASS PROSPECTUS:
The NAV of Class Z shares will generally be higher than the NAV of Class A,
B or C shares because Class Z shares are not subject to any distribution
and/or service fee. It is expected, however, that the NAV of the four classes
will tend to converge immediately after the recording of dividends, which will
differ by approximately the amount of the distribution-related expense accrual
differential among the classes.
THE FOLLOWING INFORMATION SUPPLEMENTS "TAXES, DIVIDENDS AND DISTRIBUTIONS--
TAXATION OF SHAREHOLDERS" IN THE RETAIL CLASS PROSPECTUS:
As a qualified plan, the PSI 401(k) Plan generally pays no federal income
tax. Individual participants in the Plan should consult Plan documents and
their own tax advisers for information on the tax consequences associated with
participating in the PSI 401(k) Plan.
The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, B or C shares because Class Z shares are not
subject to any distribution or service fee.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION UNDER "SHAREHOLDER
GUIDE--HOW TO BUY SHARES OF THE FUND" AND "SHAREHOLDER GUIDE--HOW TO SELL YOUR
SHARES" IN THE RETAIL CLASS PROSPECTUS:
Class Z shares of the Fund are offered exclusively for sale to participants
in the PSI 401(k) Plan. Such shares may be purchased or redeemed only by the
Plan on behalf of individual Plan participants at NAV without any sales or
redemption charge. Class Z shares are not subject to any minimum investment
requirements. The Plan purchases and redeems shares to implement the
investment choices of individual Plan participants with respect to
contributions in the Plan. All purchases through the Plan will be for Class Z
shares. Individual Plan participants should contact the Prudential Securities
Benefits Department for information on making or changing investment choices.
The Prudential Securities Benefits Department is located at One Seaport Plaza,
33rd Floor, New York, New York 10292 and may be reached by calling (212) 214-
7194.
The average net asset value per share at which shares of the Fund are
purchased or redeemed by the Plan for the accounts of individual Plan
participants might be more or less than the net asset value per share
prevailing at the time that such participants made their investment choices or
made their contributions to the Plan.
THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO EXCHANGE
YOUR SHARES" IN THE RETAIL CLASS PROSPECTUS:
Class Z shareholders of the Fund may exchange their Class Z shares for Class
Z shares of certain other Prudential Mutual Funds on the basis of relative net
asset value. You should contact the Prudential Securities Benefits Department
about how to exchange your Class Z shares. See "How to Buy Shares of the Fund"
above. Participants who wish to transfer their Class Z shares out of the PSI
401(k) Plan following separation from service (i.e., voluntary or involuntary
termination of employment or retirement) will have their Class Z shares
exchanged for Class A shares at net asset value.
THE INFORMATION ABOVE ALSO SUPPLEMENTS THE INFORMATION UNDER "FUND
HIGHLIGHTS" IN THE RETAIL CLASS PROSPECTUS AS APPROPRIATE.
3
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
- -------------------------------------------------------------------------------
SUPPLEMENT DATED APRIL 15, 1996 TO
PROSPECTUS DATED OCTOBER 27, 1995
- -------------------------------------------------------------------------------
THE PROSPECTUS IS HEREBY SUPPLEMENTED BY INSERTING THE FOLLOWING INFORMATION
PRIOR TO PAGE 5, "HOW THE FUND INVESTS":
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED) (CLASS A, CLASS B
AND CLASS C SHARES)
The following financial highlights for Class A, Class B and Class C shares
are unaudited. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class A, Class B and Class C share of common stock, respectively, outstanding,
total return, ratios to average net assets and other supplemental data for the
period indicated. The information has been determined based on data contained
in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------- ----------- -----------
NOVEMBER 2, NOVEMBER 2, NOVEMBER 2,
1995(a) 1995(a) 1995(a)
THROUGH THROUGH THROUGH
MARCH 31, MARCH 31, MARCH 31,
1996 1996 1996
----------- ----------- -----------
<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) (.03)
Net realized and unrealized gain on
investment transactions............. .39 .39 .39
--------- -------- -------
Total from investment operations.... .39 .36 .36
--------- -------- -------
Net asset value, end of period....... $ 10.39 $ 10.36 $ 10.36
========= ======== =======
TOTAL RETURN(c)...................... 3.90 % 3.60 % 3.60 %
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) ..... $ 71,303 $156,909 $12,697
Average net assets (000) ............ $ 60,165 $120,106 $10,468
Ratios to average net assets (b):
Expenses, including distribution
fees.............................. 1.18 % 1.93 % 1.93 %
Expenses, excluding distribution
fees.............................. .93 % .93 % .93 %
Net investment income.............. (.09)% (.84)% (.84)%
Portfolio turnover rate.............. 19 % 19 % 19 %
Average commission rate paid per
share............................... $ .0595 $ .0595 $ .0595
</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.
1
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS THE "SHAREHOLDER GUIDE--HOW TO BUY
SHARES OF THE FUND" IN THE PROSPECTUS:
The minimum initial investment requirement is waived for purchases of shares
of the Fund made through Pruco Securities Corporation (Prusec) which are in
conjunction with purchases made through the "Best Minds" program sponsored by
the Distributor. For more information about this program, you should contact
your Prusec representative.
The following information supplements "How to Sell Your Shares" in the
Prospectus.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege you may reinvest any portion or
all of the proceeds of such redemption in shares of the Portfolio at the NAV
next determined after the order is received, which must be within 90 days
after the date of the redemption. Any contingent deferred sales charge or CDSC
paid in connection with such redemption will be credited (in shares) to your
account. (If less than a full repurchase is made, the credit will be on a pro
rata basis.) You must notify the Fund's Transfer Agent, either directly or
through Prudential Securities, at the time the repurchase privilege is
exercised to adjust your account for the CDSC you previously paid. Thereafter,
any redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any
gain realized upon redemption. However, if the redemption was made within a 30
day period of the repurchase and if the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, may not be allowed for
federal income tax purposes.
THE FOLLOWING INFORMATION SUPPLEMENTS "GENERAL INFORMATION--DESCRIPTION OF
COMMON STOCK" IN THE PROSPECTUS:
The Fund is authorized to offer 2.5 billion shares of common stock, $.001
par value per share, divided into four classes of shares, designated Class A,
Class B, Class C and Class Z shares. Of the authorized shares of common stock,
1 billion shares consist of Class A common stock, 500 million shares consist
of Class B common stock, 500 million shares consist of Class C common stock
and 500 million shares consist of Class Z common stock. Each class represents
an interest in the same assets of the Fund and is identical in all respects
except that (i) each class is subject to different sales charges and
distribution and/or service fees, which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to participants in the PSI 401(k)
Plan, an employee benefit plan sponsored by Prudential Securities. Since Class
B and Class C shares generally bear higher distribution expenses than Class A
shares, the liquidation proceeds to shareholders of those classes are likely
to be lower than to Class A shareholders and to Class Z shareholders, whose
shares are not subject to any distribution and/or service fee. In accordance
with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights
as the Directors may determine. Currently, the Fund is offering four classes,
designated Class A, Class B, Class C and Class Z shares.
THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO BUY SHARES
OF THE FUND--REDUCTION AND WAIVER OF INITIAL SALES CHARGES" IN THE PROSPECTUS:
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all
persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers
who have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's
2
<PAGE>
employer and (e) investors who have a business relationship with a financial
adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 180 days of the commencement of
the financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end fund sponsored by the financial
adviser's previous employer (other than a money market fund or other no-load
fund which imposes a distribution or service fee of .25 of 1% or less) and
(iii) the financial adviser served as the client's broker on the previous
purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
THE FOLLOWING INFORMATION FOR THE CLASS Z SHARES SUPPLEMENTS "HOW THE FUND
CALCULATES PERFORMANCE" IN THE PROSPECTUS:
The Fund will include performance data for each class of shares offered
through the Prospectus in any advertisement or information including
performance data of the Fund.
3
<PAGE>
PRUDENTIAL JENNISON FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 27, 1995
- -------------------------------------------------------------------------------
Prudential Jennison Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth
of capital. The Fund seeks to achieve this objective by investing primarily in
equity securities (common stock, preferred stock and securities convertible
into common stock) of established companies with above-average growth
prospects. Current income, if any, is incidental. Under normal market
conditions, the Fund intends to invest at least 65% of its total assets in
equity securities of companies that exceed $1 billion in market
capitalization. The Fund may also invest in (i) equity securities of other
companies including foreign issuers, (ii) investment grade fixed-income
securities and (iii) obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, including mortgage-backed securities. The
Fund may engage in various derivative securities transactions, such as options
on stocks, stock indices and foreign currencies, foreign currency exchange
contracts and the purchase and sale of futures contracts on stock indices and
options thereon to hedge its portfolio and to attempt to enhance return. 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 One Seaport Plaza, New York, New York 10292, and its telephone number is
(800) 225-1852.
The Fund is not intended to constitute a complete investment program. Because
of its objectives and policies and its emphasis on growth stocks, the Fund may
be considered subject to greater investment risks than are assumed by certain
other investment companies.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated October 27, 1995, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read the Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL JENNISON FUND, INC.?
Prudential Jennison Fund, Inc. 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 Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this objective by investing primarily in equity securities (common
stock, securities convertible into common stock and preferred stock) of
established companies with above-average growth prospects. Current income, if
any, is incidental. See "How the Fund Invests--Investment Objective and
Policies" at page 5.
RISK FACTORS AND SPECIAL CHARACTERISTICS
Securities of the kinds of companies in which the Fund invests may be subject
to significant price fluctuation and above-average risk. In addition, companies
achieving an earnings growth rate higher than that of S&P 500 companies tend to
reinvest their earnings rather than distribute them. As a result, the Fund is
not likely to receive significant dividend income on its portfolio securities.
Accordingly, an investment in the Fund should not be considered as a complete
investment program and may not be appropriate for all investors.
Under normal market conditions, the Fund intends to invest at least 65% of
its total assets in equity securities of companies that exceed $1 billion in
market capitalization. See "How the Fund Invests--Investment Objective and
Policies" at page 5. The Fund may also invest in (i) other equity securities
including up to 20% of its total assets in securities of foreign issuers, (ii)
investment grade fixed-income securities and (iii) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
including mortgage-backed securities. Investing in securities of foreign
companies and countries involves certain risks and considerations not typically
associated with investments in domestic companies. See "How the Fund Invests--
Risk Factors and Special Considerations of Investing in Foreign Securities" at
page 9. The Fund may also engage in various hedging and return enhancement
strategies and invest in derivative securities. See "How the Fund Invests--
Hedging and Return Enhancement Strategies--Risks of Hedging and Return
Enhancement Strategies" at page 12.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager), is the manager
of the Fund and is compensated for its services at an annual rate of .60 of 1%
of the Fund's average daily net assets. As of September 30, 1995, PMF served as
manager or administrator to 64 investment companies, including 37 mutual funds,
with aggregate assets of approximately $51 billion. Jennison Associates Capital
Corp. (Jennison, the Subadviser or the investment adviser) furnishes investment
advisory services in connection with the management of the Fund under a
Subadvisory Agreement with PMF. See "How the Fund is Managed--Manager" at
page 13 and "How the Fund is Managed--Subadviser" at page 14.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B and Class C shares and is paid a
distribution and
2
<PAGE>
service fee with respect to Class A shares which is currently being charged at
the annual rate of .25 of 1% of the average daily net assets of the Class A
shares and is paid a distribution and service fee with respect to Class B and
Class C shares at an annual rate of 1% of the average daily net assets of each
of the Class B and Class C shares. See "How the Fund is Managed--Distributor"
at page 14.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How
to Buy Shares of the Fund" at page 20 and "Shareholder Guide--Shareholder
Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How The Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 20.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing expenses) approximately seven
years after purchase.
. Class C Shares: Sold without an initial sales charge but, for one year
after purchase, are subject to a CDSC of 1% on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 21.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, semi-
annually 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 17.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............. None None None
Deferred Sales Load (as
a percentage of origi-
nal purchase price or
redemption proceeds,
whichever is lower)... None 5% during the first year, 1% on redemptions
decreasing by 1% annually to made within one
1% in the fifth and year of purchase
the sixth years and
0% in the seventh year*
Redemption Fees........ None None None
Exchange Fees.......... None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets)
Management Fees........ .60% .60% .60%
12b-1 Fees (After Re-
duction)............. .25%++ 1.00% 1.00%
Other Expenses......... .52% .52% .52%
---- ---- ----
Total Fund Operating
Expenses (After Re-
duction)............. 1.37% 2.12% 2.12%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, as-
suming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A........................................................ $63 $91
Class B........................................................ $72 $96
Class C........................................................ $32 $66
You would pay the following expenses on the same investment, as-
suming no redemption:
Class A........................................................ $63 $91
Class B........................................................ $22 $66
Class C........................................................ $22 $66
</TABLE>
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 an investor 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" include estimated
operating expenses of the Fund, for the fiscal year ending September 30, 1996,
such as Directors' and professional fees, registration fees, reports to
shareholders, transfer agency and custodian (domestic and foreign) fees (but
excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges (12b-1 fees) on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on the Fund rather than on a per shareholder basis. Therefore, long-
term Class B and Class C shareholders of the Fund may pay more in total
sales charges than the economic equivalent of 6.25% of such shareholders'
investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay up to an annual rate of .30 of 1% of the average daily net assets of
the Class A shares, the Distributor has agreed to limit its distribution
fees with respect to Class A shares of the Fund so as not to exceed .25 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending September 30, 1996. See "How the Fund is Managed--Distributor." Total
Fund Operating Expenses would be 1.42% absent this limitation with respect
to Class A shares.
4
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. THE FUND
SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING PRIMARILY IN EQUITY SECURITIES
(COMMON STOCK, PREFERRED STOCK AND SECURITIES CONVERTIBLE INTO COMMON STOCK)
OF ESTABLISHED COMPANIES WITH ABOVE-AVERAGE GROWTH PROSPECTS. CURRENT INCOME,
IF ANY, IS INCIDENTAL. THERE CAN BE NO ASSURANCE THAT THE FUND'S OBJECTIVE
WILL BE ACHIEVED. See "Investment Objective and Policies" in the Statement of
Additional Information.
UNDER NORMAL MARKET CONDITIONS, THE FUND INTENDS TO INVEST AT LEAST 65% OF
ITS TOTAL ASSETS IN EQUITY SECURITIES OF COMPANIES THAT EXCEED $1 BILLION IN
MARKET CAPITALIZATION. COMPANIES WITH MARKET CAPITALIZATIONS IN EXCESS OF
$1 BILLION ARE GENERALLY CONSIDERED MEDIUM TO LARGE CAPITALIZATION COMPANIES.
Stocks will be selected on a company-by-company basis primarily through the
use of fundamental analysis. The Fund's Subadviser looks for companies that
have demonstrated growth in earnings and sales, high returns on equity and
assets, or other strong financial characteristics, and, in the judgment of the
Subadviser, are attractively valued. These companies tend to have a unique
market niche, a strong new product profile or superior management.
The Fund may also invest up to 35% of its total assets in (i) equity
securities of other companies that are undergoing changes in management or
product and marketing dynamics that have not yet been reflected in reported
earnings but that are expected to impact earnings in the intermediate-term--
these securities often lack investor recognition and are often favorably
valued, (ii) other equity-related securities, (iii) with respect to 20% of its
total assets, equity securities of foreign issuers, (iv) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
including mortgage-backed securities and (v) investment grade fixed-income
securities.
The effort to achieve superior investment return necessarily involves a risk
of exposure to declining values. Securities in which the Fund may primarily
invest have historically been more volatile than the S & P 500 Index.
Accordingly, during periods when stock prices decline generally, it can be
expected that the value of the Fund will decline more than market indices.
Securities of the kinds of companies in which the Fund invests may be
subject to significant price fluctuation and above-average risk. In addition,
companies achieving an earnings growth rate higher than that of S&P 500
companies tend to reinvest their earnings rather than distribute them. As a
result, the Fund is not likely to receive significant dividend income on its
portfolio securities. Accordingly, an investment in the Fund should not be
considered as a complete investment program and may not be appropriate for all
investors.
In addition, the Fund may purchase and sell put and call options on equity
securities, stock indices and foreign currencies, purchase and sell futures
contracts on stock indices, foreign currencies and options thereon and enter
into forward foreign currency exchange contracts to hedge its portfolio and to
attempt to enhance return. The Fund may also lend its portfolio securities,
enter into repurchase agreements and purchase securities on a when-issued and
delayed delivery basis.
The Fund reserves the right as a defensive measure to hold temporarily other
types of securities without limit, including high quality commercial paper,
bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of United
States and non-United States issuers, or cash (foreign currencies or United
States dollars), in such proportions as, in the opinion of Jennison,
prevailing market, economic or political conditions warrant. The Fund may also
temporarily hold cash and invest in high quality foreign or domestic money
market instruments pending investment of proceeds from new sales of Fund
shares or to meet ordinary daily cash needs. See "Other Investments and
Policies" below.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND 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.
INVESTMENT POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF
DIRECTORS.
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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 Objective and Policies--U.S. Government Securities" in the
Statement of Additional Information.
The Fund may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership
interest in a pool of mortgages, e.g., Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) certificates where the U.S. Government
or its agencies or instrumentalities guarantees the payment of interest and
principal of these securities. These guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with
fluctuations in interest rates, nor do these guarantees extend to the yield or
value of the Fund's shares. See "Investment Objective and Policies--U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Accordingly, amounts available for
reinvestment by the Fund are likely to be greater during a period of declining
interest rates and, as a result, likely to be reinvested at lower interest
rates than during a period of rising interest rates. Mortgage-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may purchase collateralized
mortgage obligations (CMO) issued by agencies or instrumentalities of the U.S.
Government. A CMO is backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed
securities. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit (REMIC). All future references to CMOs
shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
The Fund may also invest in mortgage-backed security strips (MBS strips)
issued by the U.S. Government or its agencies or instrumentalities. MBS strips
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A
common type of stripped mortgage security will have one class receiving some
of the interest and most of the principal from the mortgage assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the expected or anticipated rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to
maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may not fully recoup its
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initial investment in IOs. Conversely, if the underlying mortgage assets
experience less than anticipated prepayments of principal, the yield on POs
could be materially adversely affected.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objective and
Policies--U.S. Government Securities--Mortgage-Related Securities issued by
U.S. Government Agencies and Instrumentalities" in the Statement of Additional
Information.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in investment grade corporate and other debt obligations
of domestic and foreign issuers, including convertible securities and money
market instruments. See "Money Market Instruments" below. Bonds and other debt
securities are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Investment grade debt securities are rated within the
four highest quality grades as determined by Moody's Investors Service
(Moody's) (currently Aaa, Aa, A and Baa for bonds), or Standard & Poor's
Ratings Group (S&P) (currently AAA, AA, A and BBB for bonds), or by another
nationally recognized statistical rating organization (NRSRO) or, in unrated
securities which are of equivalent quality in the opinion of Jennison. In the
event a security (or issuer) held by the Fund is assigned a rating below
investment grade (or, in the view of Jennison, has declined in credit quality
so that it is comparable to a security rated below investment grade), Jennison
will seek to dispose of the security as soon as reasonably practicable.
Securities rated Baa by Moody's or BBB by S&P, although considered to be
investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.
EQUITY-RELATED SECURITIES. The Fund may invest in equity-related securities.
Equity-related securities are common stock, preferred stock, rights, warrants
and debt securities or preferred stock which are convertible or exchangeable
for common stock or preferred stock. See "Convertible Securities" below.
CONVERTIBLE SECURITIES
A CONVERTIBLE SECURITY IS A BOND OR PREFERRED STOCK WHICH MAY BE CONVERTED
AT A STATED PRICE WITHIN A SPECIFIED PERIOD OF TIME INTO A CERTAIN QUANTITY OF
THE COMMON STOCK OF THE SAME OR A DIFFERENT ISSUER. 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.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original
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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 purchase price of the underlying securities (including
accrued interest earned thereon). 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. See "Investment Objective and Policies--Repurchase Agreements"
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 or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. The Fund may invest in money market instruments without
limit for temporary defensive and cash management purposes. To the extent the
Fund otherwise invests in money market instruments, it is subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings. If
the Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings. The Fund will not purchase portfolio
securities when borrowings exceed 5% of the value of its total assets. See
"Borrowing" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 10% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and 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 Fund intends to comply with any applicable state blue sky laws
restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors. Repurchase agreements subject to demand
are deemed to have a maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
(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. See "Investment Objective and Policies--Illiquid Securities" in the
Statement of Additional Information.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 75%, although the rate is not expected to exceed 100%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information. 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."
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place a month or more in the future in order to
secure what is considered to be an advantageous price and/or yield to the Fund
at the time of entering into the transaction. While the Fund will only
purchase securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities, the Fund may sell the securities before
the settlement date, if it is deemed advisable. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis,
the Fund will record the transaction and thereafter reflect the value, each
day, of such security in determining the net asset value of the Fund. At the
time of delivery of the securities, the value may be more or less than the
purchase price. The Fund's Custodian will maintain, in a segregated account of
the Fund, cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the Fund's purchase
commitments; the Custodian will likewise segregate securities sold on a
delayed delivery basis. Subject to this requirement, the Fund may purchase
securities on such basis without limit. See "Investment Objective and
Policies--When-Issued and Delayed Delivery Securities" in the Statement of
Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregate account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As with
any extensions of credit, there are risks of delay in recovery and in some
cases loss of rights in the collateral should the borrower of the securities
fail financially. As a matter of fundamental policy, the Fund cannot lend more
than 30% of the value of its total assets. See "Investment Objective and
Policies--Lending of Securities" in the Statement of Additional Information.
The Fund may pay reasonable administration and custodial fees in connection
with a loan.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns an equal amount of
the securities sold short or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issue as,
and equal in amount to, the securities sold short.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF
EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment.
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ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than United States brokerage commissions. Increased custodian
costs as well as administrative difficulties (such as the applicability of
foreign laws to foreign custodians in various circumstances) may be associated
with the maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. The Fund may, but need not, enter into forward foreign currency
exchange contracts, options on foreign currencies and futures contracts on
foreign currencies and related options, for hedging purposes, including:
locking-in the U.S. dollar price of the purchase or sale of securities
denominated in a foreign currency; locking-in the U.S. dollar equivalent of
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.
SHAREHOLDERS SHOULD BE AWARE THAT INVESTING IN THE EQUITY MARKETS OF
DEVELOPING COUNTRIES INVOLVES EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS
DIVERSE AND MATURE, AND TO POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE
LESS STABILITY THAN THOSE OF DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE
INDICATES THAT THE MARKETS OF DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE
THAN THE MARKETS OF DEVELOPED COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS
IN FOREIGN SECURITIES, DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO
INVESTMENTS IN DEVELOPING COUNTRIES.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. These strategies
currently include the use of derivatives, such as options, forward currency
exchange contracts and futures contracts and options thereon. The Fund's
ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that
any of these strategies will succeed. See "Investment Objective and Policies"
and "Taxes" in the Statement of Additional Information. Jennison does not
intend to buy all of these instruments or use all of these strategies to the
full extent permitted unless it believes that doing so will help the Fund
achieve its objective. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and
policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES, STOCK INDICES AND CURRENCIES THAT ARE TRADED ON U.S. OR FOREIGN
SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE RETURN OR TO
HEDGE THE FUND'S PORTFOLIO. These options will be on equity securities, stock
indices (e.g., S&P 500) and foreign currencies. The Fund may write covered put
and call options to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of securities
(or currencies) that it owns against a decline in market value and purchase
call options in an effort to protect against an increase in the price of
securities (or currencies) it intends to
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purchase. The Fund may also purchase put and call options to offset previously
written put and call options of the same series. See "Investment Objective and
Policies--Options on Securities" 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 CURRENCY SUBJECT
TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in
the underlying security or currency or maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value sufficient
at all times to cover its obligations in a segregated account. See "Investment
Objective and Policies--Options on Securities" in the Statement of Additional
Information. There is no limitation on the amount of call options the Fund may
write. The Fund has undertaken with certain state securities commissions that,
so long as shares of the Fund are registered in those states, it will not (a)
write puts having aggregate exercise prices greater than 25% of total net
assets, or (b) purchase (i) put options on stocks not held in the Fund's
portfolio, (ii) put options on stock indices or foreign currencies or (iii)
call options on stock, stock indices or foreign currencies if, after any such
purchase, the aggregate premiums paid for such options would exceed 10% of the
Fund's total assets; provided, however, that the Fund may purchase put options
on stocks held by the Fund if after such purchase the aggregate premiums paid
for such options do not exceed 20% of the Fund's total assets. The aggregate
value of the securities underlying call options and the obligations underlying
put options (as of the date the options are sold) will not exceed 25% of the
Fund's net assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot,
i.e., cash, basis at the rate then prevailing in the currency exchange market
or on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of forward currency)
of the securities held in its portfolio denominated or quoted in, or currently
convertible into, such currency. See "Investment Objective and Policies--Risks
Related to Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
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FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). These futures contracts and related options will be on stock indices
and foreign currencies. A futures contract is an agreement to purchase or sell
an agreed amount of securities or currencies at a set price for delivery in
the future. A stock index futures contract is an agreement to purchase or sell
cash equal to a specific dollar amount times the difference between the value
of a specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. The Fund may purchase and sell stock
index futures contracts or related options as a hedge against changes in
market conditions.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold
the security or currency underlying the futures contract, the Fund will be
required to segregate on an ongoing basis with its Custodian cash, U.S.
Government securities or other liquid, high grade debt obligations in an
amount at least equal to the Fund's obligations with respect to such futures
contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies underlying the futures contract is imperfect and there is a
risk that the value of the indices or currencies underlying the futures
contract may increase or decrease at a greater rate than the related futures
contracts resulting in losses to the Fund. Certain futures exchanges or boards
of trade have established daily limits on the amount that the price of futures
contracts or related options may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict the Fund's ability to
purchase or sell certain futures contracts or related options on any
particular day.
The Fund's ability to enter into futures contracts and options thereon is
limited by the requirements of the Internal Revenue Code for qualification as
a regulated investment company. See "Taxes" in the Statement of Additional
Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. If the Subadviser's
predictions of movements in the direction of the securities, foreign currency
and interest rate markets are inaccurate, the adverse consequences to the Fund
may leave the Fund in a worse position than if such strategies were not used.
Risks inherent in the use of options, foreign currency and futures contracts
and options on futures contracts include (1) dependence on the Subadviser's
ability to predict correctly movements in the direction of interest rates,
securities prices and currency markets; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in
the prices of the securities or currencies being hedged; (3) the fact that
skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences;
and (6) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with hedging transactions. See "Taxes" in the Statement
of Additional Information.
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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 management 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.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS 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.
The Fund is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Directors; (iii) the fees of the Fund's
Custodian and Transfer and Dividend Disbursing Agent; (iv) the fees of the
Fund's legal counsel and independent accountants; (v) brokerage commissions
incurred in connection with portfolio transactions; (vi) all taxes and charges
of governmental agencies; (vii) the reimbursement of organization expenses;
and (viii) expenses related to shareholder communications including all
expenses of shareholders' and Board of Directors' meetings and of preparing,
printing and mailing reports, proxy statements and prospectuses to
shareholders.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .60 OF 1% OF THE FUND'S AVERAGE DAILY
NET ASSETS. IT WAS INCORPORATED IN MAY 1987 UNDER THE LAWS OF THE STATE OF
DELAWARE. SEE "MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
As of September 30, 1995, PMF served as the manager to 36 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 27 closed-end investment companies with aggregate
assets of approximately $51 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
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SUBADVISER
JENNISON ASSOCIATES CAPITAL CORP. (JENNISON OR THE SUBADVISER), 466
LEXINGTON AVENUE, NEW YORK, NEW YORK, 10017, IS THE SUBADVISER TO THE FUND. It
was incorporated in 1969 under the laws of the State of New York. As of
September 30, 1995, Jennison has over $27.8 billion in assets under management
for institutional and mutual fund clients, including over $15.3 billion in
"growth stock" assets.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PMF, JENNISON FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
COMPENSATED BY PMF FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $300 MILLION AND .25 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $300 MILLION.
Under the Subadvisory Agreement, Jennison, subject to the supervision of
PMF, is responsible for managing the assets of the Fund in accordance with its
investment objective, investment program and policies. Jennison determines
what securities and other instruments are purchased and sold for the Fund and
is responsible for obtaining and evaluating financial data relevant to the
Fund.
David Poiesz is the portfolio manager of the Fund and Peter Reinemann is the
associate portfolio manager of the Fund. Mr. Poiesz is responsible for the
day-to-day management of the Fund. They are both Senior Vice Presidents of
Jennison and have been involved with the Fund since its inception in 1995. Mr.
Poiesz, also a Director of Jennison, joined Jennison in 1983 as an equity
research analyst and has been an equity portfolio manager since 1991. Mr.
Reinemann has been with Jennison since 1992 as an associate portfolio manager.
Prior to that time, he served as a Vice President at Paribas Asset Management,
Inc.
PMF and Jennison are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A,
CLASS B AND CLASS C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED
SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (ALSO THE DISTRIBUTOR) INCURS
THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
These expenses include commissions and account servicing fees paid to, or on
account of, financial advisers of Prudential Securities and Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements
with the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The
State of Texas requires that shares of the Fund may be sold in that state only
by dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
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UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. Prudential Securities has
agreed to limit its distribution-related fees payable under the Class A Plan
to .25 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending September 30, 1996.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers and other persons which distribute shares of the
Fund. Such payments may be calculated by reference to the net asset value of
shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purposes of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
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<PAGE>
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the
signing of the agreement, provided that PSI complies with the terms of the
agreement. If, upon completion of the three year period, PSI has complied with
the terms of the agreement, no prosecution will be instituted by the United
States for the offenses charged in the complaint. If on the other hand, during
the course of the three year period, PSI violates the terms of the agreement,
the U.S. Attorney can then elect to pursue these charges. Under the terms of
the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS 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 Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
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The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. See "Net Asset Value" in the
Statement of Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. It is expected,
however, that the NAV of the three classes will tend to converge immediately
after the recording of dividends, which will differ by approximately the
amount of distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five, or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance
and takes into account any applicable initial or contingent deferred sales
charges. Neither "average annual" total return nor "aggregate" total return
takes into account any federal or state income taxes which may be payable upon
redemption. The "yield" refers to the income generated by an investment in the
Fund over a one-month or 30-day period. This income is then "annualized;" that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown
as a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing
the Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information will be contained in the Fund's annual and semi-annual reports to
shareholders, which will be available without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND INTENDS TO ELECT TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT
TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF
ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
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The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized by the Fund. See "Taxes" in the Statement of Additional
Information.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts).
At the end of each year, such investments held by the Fund will be required to
be "marked to market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. See "Taxes" in the Statement of Additional Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income. The maximum long-term capital gains rate for individual
shareholders is currently 28% and the maximum tax rate for ordinary income is
39.6%.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. See "Taxes" in the Statement of Additional Information.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required certifications regarding
the shareholder's status under the federal income tax law.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, SEMI-
ANNUALLY AND TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-
TERM CAPITAL LOSSES AT LEAST ANNUALLY. Dividends paid by the Fund with respect
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to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
charges, generally resulting in lower dividends for Class B and Class C
shares. Distribution of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How The Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
adviser to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND", ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
(WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE
PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR
INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON AUGUST 10, 1995. THE FUND IS
AUTHORIZED TO ISSUE 2.5 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z COMMON STOCK. OF THE AUTHORIZED SHARES OF COMMON STOCK, 1 BILLION
SHARES CONSIST OF CLASS A COMMON STOCK, 500 MILLION SHARES CONSIST OF CLASS B
COMMON STOCK, 500 MILLION SHARES CONSIST OF CLASS C COMMON STOCK AND 500
MILLION SHARES CONSIST OF CLASS Z COMMON STOCK. Each class of common stock
represents an interest in the same assets of the Fund and is identical in all
respects except that (i) each class bears its respective distribution
expenses, (ii) each class has exclusive voting rights with respect to its
distribution and service plan (except that the Fund has agreed with the SEC in
connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A distribution and service plan to both
Class A and Class B shareholders), (iii) each class has a different exchange
privilege and (iv) only Class B shares have a conversion feature. See "How The
Fund Is Managed--Distributor." Pursuant to an order of the SEC, the Fund is
permitted to issue and sell multiple classes of common stock. Currently, the
Fund is offering three classes, designated Class A, Class B and Class C
shares. Class Z shares are not being offered at the present time. In
accordance with the Fund's Articles of Incorporation, the Board of Directors
may authorize the creation of additional series of common stock and classes
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares. Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class
of common stock is equal as to earnings, assets and voting privileges, except
as noted above, and each class bears the expenses related to the distribution
of its shares. Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled
to its portion of all of the Fund's assets after all debts and expenses of the
Fund have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds
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to shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS 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 FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL
OF ONE OR MORE DIRECTORS 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 Fund with the SEC under
the Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities, Prusec or
directly from the Fund, through its Transfer Agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The offering price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "Alternative Purchase Plan"
below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock 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 stock
certificates.
The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares. The minimum subsequent investment is
$100 for all classes. All minimum investment requirements are waived for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases through the Automatic Savings Accumulation
Plan the minimum initial and subsequent investment is $50. See "Shareholder
Services."
The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you
to your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston,
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<PAGE>
Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Jennison Fund, Inc., specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A, Class B or Class C shares).
If you arrange for receipt by State Street of federal funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Jennison Fund,
Inc., Class A, Class B or Class C shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing federal funds. The minimum amount which may be invested by wire is
$1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived
of 5% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% shares approximately seven
of the lesser of the amount years after purchase
invested or the redemption
proceeds; declines to zero
after six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount another class
invested or the redemption
proceeds on redemptions made
within one year of purchase.
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
as noted under the heading "General Information--Description of Common Stock")
and (iii) only Class B shares have a conversion feature. The three classes
also have separate exchange privileges. See "How to Exchange Your Shares"
below. The income attributable to each class and the dividends payable on the
shares of each class will be reduced by the amount of the distribution fee of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
In selecting a purchase alternative, you should consider, among other
things, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares"
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<PAGE>
below) and (5) the fact that Class B shares automatically convert to Class A
shares approximately seven years after purchase (see "Conversion Feature--
Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in net asset value, the effect of
the return on the investment over this period of time or redemptions during
which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES. SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
22
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) or 1,000 eligible employees or participants. In the case of Benefit
Plans whose accounts are held directly with the Transfer Agent or Prudential
Securities and for which the Transfer Agent or Prudential Securities does
individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype
Benefit Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
PRUARRAY PLANS. Class A shares may be purchased at NAV by certain retirement
and deferred compensation plans, qualified or non-qualified under the Internal
Revenue Code, including pension, profit-sharing, stock-bonus or other employee
benefit plans under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code that participate in the Transfer Agent's PruArray Program (a
benefit plan recordkeeping service) (hereafter referred to as a PruArray
Plan); provided (i) that the plan has at least $1 million in existing assets
or 1,000 eligible employees or participants, and (ii) that Prudential Mutual
Funds constitute at least one-half of the plan's investment options. The term
"existing assets" for this purpose includes stock issued by a PruArray Plan
sponsor, shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray Program (Participating Funds). "Existing assets" also include shares
of money market funds acquired by exchange from a Participating Fund.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Directors and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members
of the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents
of Prudential and its subsidiaries and all persons who have retired directly
from active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service
fee of .25 of 1% or less) and (iii) the financial adviser served as the
client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
23
<PAGE>
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, Prudential Securities or Prusec.
Although there is no sales charge imposed at the time of purchase, redemption
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares."
In certain cases, however, redemption proceeds will be reduced by the amount
of any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Prudential
Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations
of the SEC shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as a regular redemption. See "How the Fund Values
its Shares." If your shares are redeemed in kind, you would incur transaction
costs
24
<PAGE>
in converting the assets into cash. The Fund has, however, elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of the net asset value of the Fund during the 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No contingent
deferred sales charge will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. No sales charge will apply to such repurchases. YOU WILL
RECEIVE PRO RATA CREDIT FOR ANY CONTINGENT DEFERRED SALES CHARGE PAID IN
CONNECTION WITH THE REDEMPTION OF CLASS B OR CLASS C SHARES. YOU MUST NOTIFY
THE FUND'S TRANSFER AGENT, EITHER DIRECTLY OR THROUGH PRUDENTIAL SECURITIES OR
PRUSEC, AT THE TIME THE REPURCHASE PRIVILEGE IS EXERCISED THAT YOU ARE
ENTITLED TO CREDIT FOR THE CONTINGENT DEFERRED SALES CHARGE PREVIOUSLY PAID.
EXERCISE OF THE REPURCHASE PRIVILEGE WILL NOT AFFECT THE FEDERAL INCOME TAX
TREATMENT OF ANY GAIN REALIZED UPON REDEMPTION. IF THE REDEMPTION RESULTS IN A
LOSS, SOME OR ALL OF THE LOSS, DEPENDING ON THE AMOUNT REINVESTED, WILL NOT BE
ALLOWED FOR FEDERAL INCOME TAX PURPOSES.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales Charges"
below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
25
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding
six years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination or disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC. The waiver will be granted subject to confirmation of your
entitlement.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
26
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares then in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or
amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, and Class C shares will not
constitute "preferential dividends" under the Internal Revenue Code and (ii)
that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C
SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No
sales charge will be imposed at the time of exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be that imposed by the
fund in which shares are initially purchased and will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market
27
<PAGE>
fund. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund. For purposes of calculating
the holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order. The exchange privilege is available
only in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly
basis, unless the shareholder elects otherwise. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C
shares and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
The exchange privilege may be modified or terminated at any time on sixty
days' notice.
28
<PAGE>
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:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including
a Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec registered
representative or the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
. 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 One
Seaport Plaza, New York, New York 10292. In addition, monthly unaudited
financial data are available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
APPENDIX A
INFORMATION ABOUT JENNISON ASSOCIATES CAPITAL CORP.
Jennison has been engaged in the equity investment management business since
1969 and is committed to managing growth stock portfolios for its clients. As
of June 30, 1995, Jennison managed $26.1 billion in assets for 150 clients,
including approximately $1.5 billion (5.7%) in mutual funds. Of the $26.1
billion in assets, $14.1 billion in assets were in growth stock portfolios for
76 clients, with an average account size of $140 million. 37, or approximately
50% of Jennison's growth equity clients are "Fortune 500" companies (as
defined by Fortune Magazine in the issue dated May 15, 1995).
The following chart shows that, as of June 30, 1995, Jennison had $26.1
billion of assets under management, with $14.1 billion managed using a "growth
equity" strategy; $1.5 billion invested in balanced portfolios; $1.7 billion
in international equity portfolios; and $8.8 billion in fixed income
portfolios.
[GRAPH APPEARS HERE]
Source: Jennison Associates Capital Corp.
Jennison generally seeks long-term client relationships. Approximately 40%
of its clients (including growth equity, international equity, balanced and
fixed income) have been with them for more than ten years. Those clients
represent over three quarters of assets under management as of June 30, 1995.
Jennison's business focus has been on managing the assets of retirement
plans. Such plans represented approximately $22.4 billion of Jennison's total
managed assets as of June 30, 1995. In addition, Jennison managed $2.0 billion
in mutual fund and insurance commingled fund assets, $1.6 billion for
endowments and foundations and $0.1 billion in other assets.
Jennison has an experienced team of investment professionals. Jennison
attributes its success over time to the knowledge and experience of its
portfolio managers and research analysts. Jennison's investment professionals
average over eleven years with Jennison and over eighteen years of investment
experience.
A-1
<PAGE>
The following charts show the total number of equity professionals employed
by Jennison, as of June 30, 1995, including the total number of portfolio
managers and the total number of equity research analysts. The charts reflect
the average number of years of investment experience as well as the number of
years of experience at Jennison.
<TABLE>
<CAPTION>
AVERAGE YEARS AVERAGE YEARS
OF OF EXPERIENCE
EXPERIENCE WITH JENNISON
------------- -------------
<S> <C> <C>
Total Equity Professionals.................. 18 11
Equity Portfolio Managers................... 21 14
Equity Research Analysts.................... 14 6
</TABLE>
David Poiesz is the Portfolio Manager and Peter Reinemann is the Associate
Portfolio Manager of the Fund. Mr. Poiesz, a Director and Senior Vice
President of Jennison, has over fifteen years of experience in the investment
business, including twelve years at Jennison. As of June 30, 1995, he managed
approximately $2.5 billion in growth stock assets for Jennison clients. Prior
to Jennison, he was a Vice President and Research Analyst at Dean Witter
Reynolds. Mr. Reinemann has been with Jennison since 1992 as an associate
portfolio manager. He previously served as a Vice President at Paribas Asset
Management, Inc.
Mr. Poiesz also serves as the portfolio manager of the Growth Stock
Portfolio of The Prudential Series Fund, Inc. and the Growth Stock Fund, a
portfolio of The Prudential Institutional Fund, which are registered
investment companies.
GROWTH STOCK INVESTING
Growth stocks are stocks of companies that have long-term growth rates in
sales and earnings that are higher than those of the overall economy. Growth
stocks are, in general, companies which have been able to capitalize on
changes in trends, new product developments or the capability to provide
unique services. Growth stocks are generally more expensive than the average
stock (sell at a higher price/earnings ratio) because investors are often
willing to pay a premium in order to participate in the superior growth they
may expect from these companies. Consequently, they also entail somewhat
higher risk if expectations are not met.
During periods of falling stock prices, the prices of growth stocks are
generally expected to decline more than the overall stock market. During
periods of stable to rising stock prices, growth stocks hold the potential for
outperforming the broad stock market.
Growth stock investing is subject to market risk. The returns from the S & P
500 Index for the past fifteen years have been particularly favorable from an
historical standpoint and there can be no assurance that this growth in the
overall stock market will continue.
Growth stocks may be appropriate investments for investors who can commit
some of their assets over an intermediate- to long-term period to
fundamentally attractive and growing companies. It should be understood,
however, that seeking above average rewards normally entails taking above
average risk.
True growth companies have been attractive investments over the long-term
because stock prices tend to reflect actual, as well as expected, earnings and
dividend growth of a company.
Investors with a long-term time horizon should plan to ride through the
normal cycles that occur in the stock market in order to benefit from what has
historically proven to be the longer-term success of growth companies.
Investors can either select individual companies on their own or invest in a
mutual fund such as the Fund, with an experienced professional investment
management team. It is likely that an individual's investment dollars can be
spread over more companies in a mutual fund, which can add the benefits of
diversification to one's stock holdings.
A-2
<PAGE>
Investing successfully in growth stocks normally requires a thorough
understanding of the factors that drive growth in individual companies. It
requires the resources to visit with companies and competitors, have access to
analysts and other industry and company experts and the ability carefully to
monitor the business and financial results of companies to ensure expected
growth rates are being achieved or exceeded. This process must be carried out
for a large universe of companies in order to select an appropriate portfolio
of growth stocks. Of course, the hardest part of investing in growth stocks is
owning today's and tomorrow's growth stocks, not yesterday's.
Jennison specializes in growth stock investing. Jennison's investment
professionals, including Messrs. Poiesz and Reinemann, focus their time on
looking for companies that have the potential to grow their sales and earnings
faster than the average large company (i.e., the sales and operating earnings
of the S&P 500).
Jennison's investment professionals have found that producers of important
new products and services frequently emerge as growth companies. Growth
companies often exhibit fundamental characteristics including attractive
growth in revenue and earnings per share, improving profitability, and
financial strength, resulting from one or more of the following
characteristics: superior management, strong market position, unique marketing
ability, outstanding research and development and global leadership. As you
would expect, such stocks are often expensive relative to other stocks, making
them potentially more vulnerable to disappointing news. Jennison believes,
however, that companies that can sustain their earnings growth have the
potential for superior, long-term capital appreciation.
Jennison's investment philosophy has remained consistent for more than a
quarter of a century. Since inception in 1969, Jennison has invested with the
belief that carefully selected growth stocks can generate investment results
superior to the stock market over an intermediate to long term.
Jennison's analysts follow approximately 400 medium to large capitalization
companies. Each company is assigned to an analyst and reviewed periodically
with Jennison's portfolio managers. Jennison devotes substantial resources to
understanding and monitoring the fundamentals of these companies. The analysts
concentrate their time on research and meetings with company managements to
develop their own earnings estimates, and maintaining contact with a broad
array of experts on Wall Street and in an industry. At Jennison, portfolio
managers, equity research analysts and the head trader attend an investment
meeting each morning to share current information and evaluations and discuss
prospective securities purchases and sales to ensure that the collective
thinking of the entire group is captured in the decision-making process.
Jennison seeks to select attractive growth companies. The Jennison
investment manager's challenge is to select about 60 stocks that they believe
have the potential to be the best performers among the larger universe of
growth stocks. Consequently, a growth stock portfolio managed by Jennison
normally consists of companies that the firm believes have the potential to
experience superior earnings growth over the next 12 to 18 months, on both an
absolute and relative basis, and which appear reasonably valued relative to
growth expectations.
On a daily basis, all of the investment decisions are made by the portfolio
manager responsible for an account, after thorough consultation with the
analyst representing the security and other Jennison portfolio managers. Any
analyst or portfolio manager can discuss a stock for ownership at the morning
investment meetings. At the meeting, a "give-and-take" discussion occurs,
exploring current company developments and intermediate-term expectations. The
overriding focus is on why a stock has the potential to be a productive
holding.
Jennison portfolio managers express their views and conclusions on
securities at these meetings. Typically, they do not take a formal vote.
Often, they agree on an equity holding although the group welcomes any
dissenting views. After this type of discussion, any portfolio manager is free
to buy the stock in question. If only one manager buys the stock and it is not
performing within a fairly short time, there is enormous pressure to sell.
Conversely, as the stock does well, pressure builds on the other portfolio
managers to buy the security.
A-3
<PAGE>
Over the years, Jennison has come to understand that successful growth stock
investing is a dynamic process. It requires, on the one hand, that the firm's
investment professionals capitalize on a company's improving growth prospects
and, on the other hand, that they respond to the "early warning signs' that
growth is slowing.
In managing portfolios, Jennison tends to increase positions within
investment guidelines as fundamentals and market action confirm its analysis.
Conversely, Jennison scales back positions in the face of mildly disappointing
results or price action that does not confirm its expectations. In the face of
substantial change of circumstances in earnings expectations, Jennison will
often sell an entire position.
Jennison has a disciplined approach to both buying and selling stocks.
BUY/SELL SUMMARY
Jennison will normally buy or increase positions in a stock when:
. Valuation is favorable relative to expected growth
. Market/industry "sells off" and company fundamentals remain intact
. Earnings expectations are substantially increased
Jennison will normally reduce stock positions when:
. A near-term price target is reached
. There are early indications of a slowdown in growth
Jennison will normally sell stock positions when:
. There is a substantial disappointment in earnings
. A long-term price objective is reached and future potential doesn't
justify a continued position in the portfolio
. A more attractive stock is identified
Two well-known approaches to investing in stocks are value investing and
growth investing. Many funds represent one or the other investment style. The
Fund follows a growth investing style.
VALUE INVESTING
Value investors look for bargains: fundamentally sound companies that are
temporarily cheap relative to their long-term potential. These may be
companies in an industry that is currently out of favor in the economy.
Industrial companies, for example, suffer when the economy enters a recession
because orders tend to fall off. Other companies may become undervalued
because they are having temporary problems with a new product or business
strategy. Although currently cheap, such a company may have significant
potential over the long term.
GROWTH INVESTING
Growth investors look for companies that will be able to grow their sales
and earnings and hopefully, their stock price faster than the overall market.
Producers of important new products and services frequently emerge as growth
companies. These companies are often found in the technology, specialty
retailing, health care and consumer products industries. Such stocks are often
expensive relative to other stocks, making them potentially more vulnerable to
disappointing news. Companies that can sustain their earnings growth, however
have the potential for superior, long-term capital appreciation.
While value stocks have tended to do better as the economy is entering a
period of strong growth, growth stocks have tended to outperform when the
economic outlook is stable. Accordingly, an investment in the Fund, which
follows a growth investing style, may not be appropriate for certain
investors. Rather than trying to "time" these events, investors are generally
better off with a balance between these two time-honored investment
strategies.
A-4
<PAGE>
APPENDIX B--HISTORICAL PERFORMANCE DATA
JENNISON ASSOCIATES CAPITAL CORP.
Set forth below is historical performance data relating to Jennison
Associates Capital Corp. (Jennison)/1/. See "Management of the Fund--
Subadviser" in the Prospectus. The data is provided to illustrate past
performance in managing similar portfolios as measured against the Standard &
Poor's 500 (S&P 500) Index and certain debt instruments. The returns quoted
for Jennison are time weighted total rates of return which include the impact
of capital appreciation as well as the reinvestment of interest and dividends,
as appropriate. Investors should not consider this performance data as an
indication of the future performance of the Fund. Securities in which the Fund
may primarily invest have historically been more volatile than the S&P 500
Index. Accordingly, during periods when stock prices decline generally, it can
be expected that the value of the Fund will decline more than market indices.
All information relies on data supplied by Jennison or from statistical
services, reports or other sources believed by the Manager to be reliable
including data from S&P and The Wall Street Journal. However, such information
has not been verified and is unaudited. Performance figures for Jennison do
not reflect all of Jennison's assets under management and may not accurately
reflect the performance of all accounts managed by Jennison.
The performance figures reflected herein have been adjusted by the deduction
of Jennison's advisory fees, as indicated. The figures do not reflect the
operating expenses of the Fund (such as Rule 12b-1 fees) or any applicable
sales charges. See "Fund Expenses" in the Prospectus. The net effect of the
deduction of the operating expenses of the Fund on annualized performance,
including the compounded effect over time, will vary by the size of the fee
and the account's investment performance, and may be substantial. The accounts
reflected in the performance data below have been determined by Jennison based
on the manner in which it prepares performance data generally. Performance
data includes both institutional and mutual fund accounts managed under the
growth equity strategy. The only accounts using the "Growth Equity" investment
strategy which are not included in the composite are not fully discretionary
(for example, do not permit certain types of investment in the account), and
individual taxable accounts, which represent approximately .1% of Jennison's
equity account assets, as of June 30, 1995.
- ---------
/1/ The historical performance data reflects "total return" and "annualized
total return," as indicated. Total return reflects actual performance over a
stated period. Total return shows how much an investment has increased
(decreased) over a specified period of time assuming the reinvestment of
dividends and interest, as appropriate. Annualized 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 period.
See "Performance Information" in the Statement of Additional Information. The
charts on pages B-2, B-4 and B-5 show annualized total returns. The charts on
pages B-3 and B-6 show actual total returns.
The Jennison composite is a time-weighted rate of total return calculated in
accordance with Performance Presentation Standards of the Association for
Investment Management and Research (AIMR). It is calculated by dividing the
period of time under study into subperiods whose boundaries are the dates of
cash and other asset flows into and from the fund and by computing the
internal rate of return for each subperiod. The time weighted rate of return
is the average of the rates for these subperiods with each rate being given a
weight proportionate to the length of time in its subperiod.
B-1
<PAGE>
ANNUALIZED TOTAL RETURNS AS OF JUNE 30, 1995 (AFTER FEES)
<TABLE>
<CAPTION>
PERIOD JENNISON/1/ S&P 500 INDEX/2/
------ ----------- ----------------
<S> <C> <C>
Since July 31, 1969
(inception)-1995 12.97 11.43
25 Years (1970-1995) 14.15 12.75
20 Years (1975-1995) 16.08 13.64
15 Years (1980-1995) 17.59 15.28
10 Years (1985-1995) 17.13 14.66
5 Years (1990-1995) 14.49 12.07
3 Years (1992-1995) 16.66 13.25
1 Year (1994-1995) 36.37 26.05
</TABLE>
- ---------
Source: Jennison Associates Capital Corp.
/1/Jennison's results are based on the time-weighted rate of return achieved
for "Growth Equity" accounts managed by Jennison. As of June 30, 1995,
Jennison managed 85 accounts representing approximately $12.5 billion in
assets using a "Growth Equity" strategy. These accounts consist of
institutional and mutual fund accounts whose investment objectives and
techniques are similar to those of the Fund. Performance results have been
adjusted by the deduction of Jennison's advisory fees and assume the
reinvestment of dividends and distributions. As of June 30, 1995, the
"Growth Equity" accounts in the composite represented 89% of all growth
equity assets (approximately $14.1 billion) managed by Jennison, and 48% of
the aggregate assets (approximately $26.1 billion) managed by Jennison. The
only accounts using the "Growth Equity" investment strategy which are not
included in the composite are not fully discretionary (for example, do not
permit certain types of investments in the account), and individual taxable
accounts which represented approximately .1% of Jennison's equity assets
under management, as of June 30, 1995.
Securities in which Jennison may primarily invest have historically been
more volatile than the S&P 500 Index. Accordingly, during periods when
stock prices decline generally, it can be expected that the value of the
Jennison Growth Equity Composite will decline more than the market indices.
/2/The S&P 500 Index is a capital-weighted index representing the aggregate
market value of the common equity of 500 stocks primarily traded on the
NYSE. These 500 stocks are composed of 400 industrial, 40 utility, 40
financial and 20 transportation companies. The weight of each stock in the
Index is proportional to its price times the number of shares outstanding.
The S&P 500 Index is an unmanaged index and includes the reinvestment of
all dividends. Investors cannot invest directly in an index.
These results are unaudited. Of course, past performance should not be
interpreted as indicative of future performance.
B-2
<PAGE>
Dollar Value of an Initial $10,000 Investment
Jennison Growth Equity Composite
July 1969 - June 1995
[GRAPH APPEARS HERE]
* Inception Date: 7/31/69=$10,000
Source: Jennison Associates Capital Corp.
These results are unaudited. Of course, past performance should not be
interpreted as indicative of future performance.
This chart compares the growth of an initial $10,000 invested in Jennison
accounts using the "Growth Equity" strategy with a similar investment in the S&P
500 Index as measured on a calendar quarterly basis from July 31, 1969 through
June 30, 1995. Jennison's results are based on the time-weighted rate of return
achieved for "Growth Equity" accounts managed by Jennison. As of June 30, 1995,
Jennison managed 85 accounts representing approximately $12.5 billion in assets
using a "Growth Equity" strategy. These accounts consist of institutional and
mutual fund accounts whose investment objectives and techniques are similar to
those of the Fund. Performance results are net of advisory fees and assume the
reinvestment of dividends and distributions. As of June 30, 1995, the "Growth
Equity" accounts represented 89% of all equity assets (approximately $14.1
billion) managed by Jennison, and 48% of the aggregate assets (approximately
$26.1 billion) managed by Jennison. The only accounts using the "Growth Equity"
investment strategy which are not included in the composite are not fully
discretionary (for example, do not permit certain types of investment in the
account), and individual taxable accounts which represented approximately 0.1%
of Jennison's equity assets under management, as of June 30, 1995.
Securities in which Jennison may primarily invest have historically been more
volatile than the S&P 500 Index. Accordingly, during periods when stock prices
decline generally, it can be expected that the value of the Jennison Growth
Equity Composite will decline more than the market indices.
The S&P 500 Index is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the NYSE. These 500
stocks are composed of 400 industrial, 40 utility, 40 financial and 20
transportation companies. The weight of each stock in the index is proportional
to its price times the number of shares outstanding. The S&P 500 Index is an
unmanaged index and includes the reinvestment of all dividends. Investors cannot
invest directly in an index.
B-3
<PAGE>
TEN-YEAR ANNUALIZED
TOTAL RETURNS
PERIODS ENDED DECEMBER 31
[GRAPH APPEARS HERE]
* Inception Date: 7/31/69
Source: Jennison Associates Capital Corp.
These results are unaudited. Of course, past performance should not be
interpreted as indicative of future performance.
This chart shows the ten-year annualized returns of Jennison accounts using the
"Growth Equity" strategy with a similar investment in the S&P 500 Index.
Jennison's results are based on the time-weighted rate of return achieved for
"Growth Equity" accounts managed by Jennison. As of December 31, 1995, Jennison
managed 81 accounts representing approximately $9.7 billion in assets using a
"Growth Equity" strategy. These accounts consist of institutional and mutual
fund accounts whose investment objectives and techniques are similar to those of
the Fund. Performance results are net of advisory fees and assume the
reinvestment of dividends and distributions. As of December 31, 1994, the
"Growth Equity" accounts represented 88% of all equity assets (approximately
$11.0 billion) managed by Jennison, and 45% of the aggregate assets
(approximately $21.4 billion) managed by Jennison. The only accounts using the
"Growth Equity" investment strategy which are not included in the composite are
not fully discretionary (for example, do not permit certain types of investments
in the account), and individual taxable accounts which represented approximately
0.1% of Jennison's equity assets under management, as of December 31, 1994.
Securities in which Jennison may primarily invest have historically been more
volatile than the S&P 500 Index. Accordingly, during periods when stock prices
decline generally, it can be expected that the value of the Jennison Growth
Equity Composite will decline more than the market indices.
The S&P 500 Index is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the NYSE. These 500
stocks are composed of 400 industrial, 40 utility, 40 financial and 20
transportation companies. The weight of each stock in the index is proportional
to its price times the number of shares outstanding. The S&P 500 Index is an
unmanaged index and includes the reinvestment of all dividends. Investors cannot
invest directly in an index.
B-4
<PAGE>
Decade-By-Decade Comparative Performance
[GRAPH APPEARS HERE]
Source: Ibbotson Associates, Chicago. Stocks, Bonds, Bills & Inflation - 1995
Yearbook. Used with permission. All rights reserved.
This chart shows the annualized total return of U.S. Treasury Bills, long-term
U.S. Government bonds and common stocks for the period from December 31, 1925
through December 31, 1994 and assumes the reinvestment of dividends and
interest, as appropriate.
This chart is used for illustrative purposes only and is not intended to
represent future performance of Prudential Jennison Fund. Common Stocks
represent the ownership of a corporation, which can fluctuate in value. Treasury
bonds and bills are backed by the full faith and credit of the U.S. Government.
Common stock total return is based on the Standard and Poor's 500 Composite, a
market-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 an index.
Long-Term Government Bonds are represented by the annual total returns of a
series of 20-year government bonds. Treasury Bills are represented by the annual
total returns of a series of short-term Treasury bills. The returns from the S&P
500 Index for the past fifteen years have been particularly favorable from an
historical standpoint and there can be no assurance that this growth in the
overall stock market will continue. This chart has not been adjusted for
inflation. Returns after inflation would be lower. Past performance is no
guarantee of future results.
B-5
<PAGE>
The Value of $10,000 Invested 25 Years Ago in:
[GRAPH APPEARS HERE]
Source: Jennison Associates Capital Corp. and Ibbotson Associates, Chicago.
Stocks, Bonds, Bills & Inflation - 1995 Yearbook. Used with Permission. All
rights reserved.
This chart shows the total return of the Jennison Growth Equity Composite, U.S.
Treasury Bills, long-term U.S. Government bonds and common stocks for the period
from December 31, 1969 through December 31, 1994 and assumes the reinvestment of
dividends and interest, as appropriate.
This chart is used for illustrative purposes only and is not intended to
represent the future performance of Prudential Jennison Fund. Common Stocks
represent the ownership of a corporation, which can fluctuate in value. Treasury
bonds and bills are backed by the full faith and credit of the U.S. Government.
Common stock total return is based on the Standard and Poor's 500 Composite, a
market-weighted index made up of the largest stocks in the U.S. based upon their
stock market value. Investors cannot invest directly in an index. Long-Term
Government Bonds are represented by the annual total returns of a series of
20-year government bonds. Treasury Bills are represented by the annual total
returns of a series of short-term Treasury bills.
The Jennison Growth Equity composite commenced on 7/31/69. Jennison's results
are based on the time-weighted rate of return achieved for "Growth Equity"
accounts managed by Jennison. As of June 30, 1995, Jennison managed 85 accounts
representing approximately $12.5 billion in assets using a "Growth Equity"
strategy. These accounts consist of institutional and mutual fund accounts whose
investment objectives and techniques are similar to those of the Fund.
Performance results are net of advisory fees and assume the reinvestment of
dividends and distributions. As of June 30, 1995, the "Growth Equity" accounts
represented 89% of all equity assets (approximately $14.1 billion) managed by
Jennison, and 48% of the aggregate assets (approximately $26.1 billion) managed
by Jennison. The only accounts using the "Growth Equity" investment strategy
which are not included in the composite are not fully discretionary (for
example, do not permit certain types of investments in the account), and
individual taxable accounts which represented approximately 0.1% of Jennison's
equity assets under management, as of June 30, 1995.
Securities in which Jennison may primarily invest have historically been more
volatile than the S&P 500 Index. Accordingly, during periods when stock prices
decline generally, it can be expected that the value of the Jennison Growth
Equity Composite will decline more than the market indices.
This chart has not been adjusted for inflation. Returns after inflation would be
lower. These results are unaudited. Of course, past performance should not be
interpreted as indicative of future performance.
B-6
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Fund at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
. 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
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
C-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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
Risk Factors and Special Characteristics.................................. 2
FUND EXPENSES.............................................................. 4
HOW THE FUND INVESTS....................................................... 5
Investment Objective and Policies......................................... 5
Other Investments and Policies............................................ 8
Risk Factors and Special Considerations of
Investing in Foreign Securities.......................................... 9
Hedging and Return Enhancement Strategies................................. 10
Investment Restrictions................................................... 13
HOW THE FUND IS MANAGED.................................................... 13
Manager................................................................... 13
Subadviser................................................................ 14
Distributor............................................................... 14
Fee Waivers and Subsidy................................................... 16
Portfolio Transactions.................................................... 16
Custodian and Transfer and Dividend Disbursing Agent...................... 16
HOW THE FUND VALUES ITS SHARES............................................. 16
HOW THE FUND CALCULATES PERFORMANCE........................................ 17
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 17
GENERAL INFORMATION........................................................ 19
Description of Common Stock............................................... 19
Additional Information.................................................... 20
SHAREHOLDER GUIDE.......................................................... 20
How to Buy Shares of the Fund............................................. 20
Alternative Purchase Plan................................................. 21
How to Sell Your Shares................................................... 24
Conversion Feature--Class B Shares........................................ 26
How to Exchange Your Shares............................................... 27
Shareholder Services...................................................... 29
APPENDIX A................................................................. A-1
APPENDIX B................................................................. B-1
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... C-1
</TABLE>
- --------------------------------------------------------------------------------
MF168A
Class A: 74437E107
CUSIP No.: Class B: 74437E206
Class C: 74437E305
PRUDENTIAL
[LOGO] JENNISON
FUND, INC.
- --------------------------------------------------------------------------------
P R O S P E C T U S
OCTOBER 27, 1995
<PAGE>
EXHIBIT 17(d)
- --------------------------------------------------------------------------------
THE PRUDENTIAL INSTITUTIONAL FUND
ThePRUDENTIAL[LOGO] Prospectus dated February 1, 1996
The Prudential Institutional Fund is a no-load mutual fund that is designed
to provide a range of investment alternatives for certain retirement programs
and arrangements and other institutional investors. The Prudential Institutional
Fund consists of the following seven investment funds:
GROWTH STOCK FUND seeks to achieve long-term growth of capital through
investment primarily in equity securities of established companies with
above-average growth prospects.
STOCK INDEX FUND seeks to provide investment results that correspond to the
price and yield performance of Standard & Poor's 500 Composite Stock Price
Index.
INTERNATIONAL STOCK FUND seeks to achieve long-term growth of capital through
investment in equity securities of foreign issuers. Income is a secondary
objective.
ACTIVE BALANCED FUND seeks to achieve total returns approaching equity returns,
while accepting less risk than an all-equity portfolio, through an
actively-managed portfolio of equity securities, fixed income securities and
money market instruments.
BALANCED FUND seeks to realize long-term total return consistent with moderate
portfolio risk.
INCOME FUND seeks to achieve a high level of income over the longer term while
providing reasonable safety of capital.
MONEY MARKET FUND seeks to achieve high current income, preservation of
principal and maintenance of liquidity, while striving to maintain a $1.00 net
asset value per share.
INVESTMENTS IN THE MONEY MARKET FUND (OR IN ANY OTHER FUND) ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT
THE MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
PROSPECTIVE INVESTORS SHOULD NOTE THAT ALL OF THE FUNDS RESERVE THE RIGHT
TO BORROW MONEY FOR TEMPORARY AND EXTRAORDINARY PURPOSES AND (EXCEPT FOR THE
MONEY MARKET FUND) IN ORDER TO TAKE ADVANTAGE OF INVESTMENT OPPORTUNITIES, WHICH
MAY BE CONSIDERED SPECULATIVE DUE TO THE INCREASED COSTS AND EXPENSES INVOLVED.
The Prudential Institutional Fund is designed to meet the needs of
retirement program sponsors, program participants, individual retirement
accounts and certain institutional investors who seek the expertise, service,
and commitment to quality that organizations within The Prudential family of
investment service companies can provide. The Prudential affiliates provide
experienced investment management, investor services, recordkeeping, and
administrative services to The Prudential Institutional Fund.
----------
This Prospectus gives you information about The Prudential Institutional
Fund that you should be aware of before investing. Additional information about
The Prudential Institutional Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information, dated February 1,
1996, which information is incorporated herein by reference and is available,
without charge, upon written request to The Prudential Institutional Fund, 21
Prudential Plaza, 751 Broad Street, Newark, New Jersey 07102-3777.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Introduction to the Funds ...................... 1
Expense Information ............................ 2
Financial Highlights ........................... 3
The Funds ...................................... 6
Risk Factors and Investment Practices and
Policies of the Fund .......................... 9
Management of the Company ...................... 10
Investors Guide to Services .................... 12
Other Considerations ........................... 13
Performance and Yield Information .............. 15
Other Investment Practices, Risk Conditions,
and Policies of the Funds ..................... 15
More Facts About the Company ................... 22
<PAGE>
INTRODUCTION TO THE FUNDS
The Company. The Prudential Institutional Fund (the "Company") is a no-load,
open-end diversified management investment company, commonly known as a mutual
fund. The Company is organized as a Delaware business trust.
The Funds. The Company is comprised of seven investment portfolios (the
"Funds"), each of which is diversified. Each Fund has its own investment
objectives and policies, which are summarized below and described in detail
beginning on page 6.
The Advisers. Each Fund is managed by a registered investment adviser
("Adviser") that is a direct or indirect subsidiary of, or is otherwise
affiliated with, The Prudential Insurance Company of America ("The Prudential").
The Advisers operate under the supervision of Prudential Institutional Fund
Management, Inc., the Company's investment manager ("Manager").
Opening an Account. The Administrator of your retirement plan or your employee
benefits office can provide you with detailed information on how to participate
in your plan and how to select a Fund as an investment option.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of Fund Investment Objective Invests Primarily in Investment Adviser
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund Seeks to achieve long-term A diversified portfolio of equity Jennison Associates Capital
growth of capital securities of established companies Corp. ("Jennison")
with above average growth prospects
- ------------------------------------------------------------------------------------------------------------------------------------
Stock Index Fund Seeks to provide investment A diversified portfolio of equity The Prudential
results that correspond to the securities, which as a group is Investment Corporation
price and yield performance of designed to approximate the price ( "PIC ")
Standard & Poor's 500 Composite and yield performance of the S&P 500
Stock Price Index Index
("S&P 500 Index")
- ------------------------------------------------------------------------------------------------------------------------------------
International Stock Fund Seeks to achieve long-term A diversified portfolio of equity Mercator Asset
growth of capital; income is a securities of foreign issuers Management, L.P.
secondary objective ("Mercator")
- ------------------------------------------------------------------------------------------------------------------------------------
Active Balanced Fund Seeks to achieve total returns An actively-managed portfolio of Jennison
approaching equity returns, equity securities, fixed income
while accepting less risk than securities and money market
an all-equity portfolio instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Fund Seeks to achieve long-term A diversified portfolio that PIC
total return consistent with allocates its assets among equity
moderate portfolio risk securities, fixed income securities
and money market instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Income Fund Seeks to achieve a high level Debt securities, including corporate PIC
of income over the longer term debt obligations, mortgage-backed
while providing reasonable and asset-backed securities, U.S.
safety of capital Government obligations, and U.S.
dollar-denominated debt securities
of foreign issuers
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund Seeks to achieve high current A diversified portfolio of PIC
income, preservation of high-quality domestic and U.S.
principal and maintenance of dollar-denominated foreign money
liquidity, while striving to market instruments that present
maintain a $1.00 net asset minimal credit risks
value per share
</TABLE>
Each Fund may be expected to have different investment results and different
market and financial risks, which are described in detail beginning on page 5.
Since shares of a Fund represent an interest in an investment in securities with
fluctuating market prices, the net asset value per share of each Fund, other
than the Money Market Fund, and the value of a shareholder's holdings will vary
as the aggregate value of a Fund's portfolio securities increases or decreases.
It is anticipated that shares of the Money Market Fund will be purchased,
redeemed or exchanged at a net asset value of $1.00 per share, although there
can be no assurance that the Fund will be able to maintain a constant net asset
value per share. For information on how to purchase and redeem shares, or to
exchange the shares of one Fund for shares of another Fund, please refer to
pages 11-12.
The dividends paid by each Fund will vary proportionally to the income
received from its investments and the expenses incurred by the Fund. Dividends
and other distributions of each Fund are declared in cash and automatically
reinvested in additional shares of the Fund. While shareholders may not elect to
receive dividends and other distributions in cash, the same effect may be
achieved at any time by redeeming shares of the Fund.
The investment objectives of each Fund set forth above are fundamental and
may not be changed without a vote of the shareholders of that Fund. However, the
investment policies and practices of each Fund, unless otherwise specifically
stated, are not fundamental. There can be no assurance that a Fund will achieve
its investment objective.
The Prudential Institutional Fund Prospectus 1
<PAGE>
EXPENSE INFORMATION
The following table, including the examples below, is included to assist your
understanding of the various costs and expenses that an investor will incur
directly and indirectly as a shareholder in each of the Funds based upon each
Fund's annual operating expenses. The fees and expenses set forth below for the
Funds are based on data for the Fund's fiscal year ended September 30, 1995. The
example should not be considered a representation of past or future performance.
Actual fees and expenses for each of the Funds for the current year may be
greater or less than those stated below.
<TABLE>
<CAPTION>
Shareholder Growth Stock International Active Money
Transaction Stock Index Stock Balanced Balanced Income Market
Expenses Fund Fund Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchase None None None None None None None
Sales Load Imposed on Reinvested Dividends None None None None None None None
Deferred Sales Load Imposed on Redemptions None None None None None None None
Redemption Fee None None None None None None None
Exchange Fee None None None None None None None
Annual Operating Expenses (as a percentage of average daily net assets)
- --------------------------------------------------------------------------------------------------------------------------
Management Fees (Before Reduction) .70% .40% 1.15% .70% .70% .50% .45%
Distribution Expenses None None None None None None None
Other Expenses (Before Reduction) .31% .48% .49% .35% .40% .48% .47%
Total Operating Expenses (Before Reduction) 1.01% .88% 1.64% 1.05% 1.10% .98% .92%
Total Operating Expenses (After Reduction)<F1> 1.00% .60% 1.60% 1.00% 1.00% .70% .60%
- ----------
<FN>
<F1> In the interest of limiting the expenses of the Funds, the Manager has
agreed, until September 30, 1996, to bear any expenses that would cause the
ratio of expenses payable by each Fund to average daily net assets ("Fund
Operating Expenses") to exceed the Fund's Total Operating Expenses (After
Reduction) as specified above. Expenses paid or assumed under this
agreement are subject to recoupment by the Manager from the relevant Fund
in later years, provided that (a) no recoupment will be made, in any year,
if it would result in the Fund's expense ratio for a year exceeding the
estimated Total Operating Expenses (After Reduction) and (b) no recoupment
will be made after December 31, 1996. Each Fund's organizational expenses
will be charged to that Fund over a period not to exceed 60 months.
</FN>
</TABLE>
Examples: An investor in each Fund would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) redemption at the end of each
future time period*:
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Growth Stock Fund $10 $32 $55 $122
- --------------------------------------------------------------------------------
Stock Index Fund $ 6 $19 $33 $ 75
- --------------------------------------------------------------------------------
International Stock Fund $16 $50 $87 $190
- --------------------------------------------------------------------------------
Active Balanced Fund $10 $32 $55 $122
- --------------------------------------------------------------------------------
Balanced Fund $10 $32 $55 $122
- --------------------------------------------------------------------------------
Income Fund $ 7 $22 $39 $ 87
- --------------------------------------------------------------------------------
Money Market Fund $ 6 $19 $33 $ 75
- ----------
* There are no charges imposed upon redemption.
The above examples should not be considered to be a representation of past or
future expenses for each Fund. Actual expenses may be greater or less than those
shown above. Similarly, the annual rate of return assumed in the above examples
is not an estimate or guarantee of future investment performance, but is
included for illustrative purposes only.
2 The Prudential Institutional Fund Prospectus
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the indicated period)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
is derived from and should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated.
<TABLE>
<CAPTION>
Growth Stock Fund Stock Index Fund
---------------------------------------- --------------------------------
November 5, November 5,
Year Ended 1992(a) Year Ended 1992(a)
September 30, Through September 30, Through
------------------ September ----------------- September
1995 1994 30, 1993 1995 1994 30, 1993
-------- -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period ........... $ 12.00 $ 12.10 $ 10.00 $ 11.27 $ 11.12 $10.00
-------- -------- ------- -------- ------- ------
Income from investment
operations:
Net investment income(b) ....................... -- -- .04 .23 .26 .23
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions ......................... 4.22 (.06) 2.08 2.97 .11 .94
-------- -------- ------- -------- ------- ------
Total from investment
operations .................................. 4.22 (.06) 2.12 3.20 .37 1.17
-------- -------- ------- -------- ------- ------
Less distributions:
Dividends from net investment income ........... (.01) (.01) (.02) (.22) (.18) (.05)
Distributions from net realized gains .......... -- (.03) -- (.03) (.04) --
-------- -------- ------- -------- ------- ------
Total distributions ............................ (.01) (.04) (.02) (.25) (.22) (.05)
-------- -------- ------- -------- ------- ------
Net asset value, end of period ................. $ 16.21 $ 12.00 $ 12.10 $ 14.22 $ 11.27 $11.12
======== ======== ======= ======== ======= ======
TOTAL RETURN(d): ............................... 35.14% (0.50)% 21.22% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................ $220,505 $106,956 $47,998 $101,945 $50,119 $27,142
Average net assets (000) ....................... $149,985 $ 71,449 $17,592 $ 71,711 $38,098 $18,807
Ratios to average net assets(b):
Expenses ...................................... 1.00% 1.00% 1.00%(c) .60% .60 .60%(c)
Net investment income (loss) .................. (.07)% .04% .31%(c) 2.55% 2.34% 2.41%(c)
Portfolio turnover rate ........................ 64% 65% 84% 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.
3 The Prudential Institutional Fund Prospectus
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the indicated period)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
is derived from and should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated.
<TABLE>
<CAPTION>
International Stock Fund Active Balanced Fund
---------------------------------------- --------------------------------
November 5, January 4,
Year Ended 1992(a) Year Ended 1993(a)
September 30, Through September 30, Through
------------------ September --------------------- September
1995 1994 30, 1993 1995 1994 30, 1993
-------- -------- ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period ........ $ 14.84 $ 12.35 $ 10.00 $ 10.92 $ 11.05 $ 10.00
-------- -------- ------- -------- ------- -------
Income from investment
operations:
Net investment income(b) .................... .18 .13 .16 .33 .24 .21
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions ...................... .66 2.54 2.21 1.54 (.12) .84
-------- -------- ------- -------- ------- -------
Total from investment
operations ............................... .84 2.67 2.37 1.87 .12 1.05
-------- -------- ------- -------- ------- -------
Less distributions:
Dividends from net investment income ........ (.10) (.03) (.02) (.29) (.14) --
Distributions from net realized gains ....... (.33) (.15) -- (.04) (.11) --
-------- -------- ------- -------- ------- -------
Total distributions ......................... (.43) (.18) (.02) (.33) (.25) --
-------- -------- ------- -------- ------- -------
Net asset value, end of period .............. $ 15.25 $ 14.84 $ 12.35 $ 12.46 $ 10.92 $ 11.05
======== ======== ======= ======== ======= =======
TOTAL RETURN(d) ............................. 5.95% 21.71% 23.74% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............. $136,685 $102,824 $31,708 $133,352 $81,176 $38,786
Average net assets (000) .................... $118,927 $ 68,476 $14,491 $104,821 $58,992 $12,815
Ratios to average net assets:(b) ............
Expenses ................................... 1.60% 1.60% 1.60%(c) 1.00% 1.00% 1.00%(c)
Net investment income ...................... 1.58% 1.08% 1.44%(c) 3.53% 3.06% 2.68%(c)
Portfolio turnover rate ..................... 20% 21% 15% 30% 40% 47%
</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.
The Prudential Institutional Fund Prospectus 4
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the indicated period)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
is derived from and should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated.
<TABLE>
<CAPTION>
Balanced Fund Income Fund Money Market Fund
----------------------------- --------------------------- ----------------------------
November 5, March 1, January 4,
Year Ended 1992(a) Year Ended 1993(a) Year Ended 1993(a)
September 30, Through September 30, Through Sepember 30, Through
---------------- September --------------- September --------------- September
1995 1994 30, 1993 1995 1994 30, 1993 1995 1994 30, 1993
------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ........ $ 11.08 $ 11.80 $ 10.00 $ 9.38 $ 10.33 $ 10.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income(b) .... .18 .31 .31 .59 .52 .27 .05 .03 .02
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions ............... 1.53 (.52) 1.54 .60 (.91) .33 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ............... 1.71 (.21) 1.85 1.19 (.39) .60 .05 .03 .02
------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income .......... (.25) (.23) (.05) (.59) (.52) (.27) (.05) (.03) (.02)
Distributions from net
realized gains ............. (.05) (.28) -- -- (.04) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ......... (.30) (.51) (.05) (.59) (.56) (.27) (.05) (.03) (.02)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .............. $ 12.49 $ 11.08 $ 11.80 $ 9.98 $ 9.38 $ 10.33 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(d) ............. 15.90% (1.88)% 18.58% 13.11% (3.91)% 6.11% 5.47% 3.32% 2.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000) ............... $82,110 $64,313 $27,663 $52,297 $41,401 $35,015 $58,054 $46,331 $30,235
Average net assets (000) .... $70,914 $44,048 $17,401 $46,386 $37,802 $25,626 $52,446 $38,170 $25,296
Ratios to average
net assets:(b)
Expenses .................. 1.00% 1.00% 1.00%(c) .70% .70% .70%(c) .60% .60% .60%(c)
Net investment income ..... 3.19% 2.86% 3.16%(c) 6.17% 5.24% 4.62%(c) 5.37% 3.34% 2.73%(c)
Portfolio turnover rate ..... 65% 52% 74% 145% 83% 93% -- -- --
</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.
5 The Prudential Institutional Fund Prospectus
<PAGE>
================================================================================
THE FUNDS
Growth Stock Fund. The objective of the Growth Stock Fund is to achieve
long-term growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects. Current income, if
any, is incidental to this objective.
Under normal market conditions, at least 65% of the value of the total assets of
the Fund will be invested in common stocks and preferred stocks of companies
that exceed $1 billion in market capitalization. Stocks will be selected on a
company-by-company basis primarily through use of fundamental analysis.
Jennison, the Adviser for the Fund, looks for companies that have demonstrated
growth in earnings and sales, high returns on equity and assets, or other strong
financial characteristics, and, in the judgment of Jennison, are attractively
valued. These companies tend to have a unique market niche, a strong new product
profile or superior management.
The Fund also may invest up to 35% of its total assets in: (i) common stocks,
preferred stocks and other equity-related securities of companies that are
undergoing changes in management or product and marketing dynamics that have not
yet been reflected in reported earnings but that are expected to impact earnings
in the intermediate term--these securities often lack investor recognition and
are often favorably valued, (ii) other equity-related securities; (iii) with
respect to a maximum of 20% of its total assets, common stocks, preferred stocks
and other equity-related securities of foreign issuers; (iv) fixed income
securities and mortgage-backed securities rated Baa or higher by Moody's
Investor Services ("Moody's") or BBB or higher by Standard & Poor's Ratings
Services or another nationally rated statistical rating organization ("NRSRO")
or, if not rated, determined by the adviser to be of comparable quality to
securities so rated ("investment grade"); and (v) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
The effort to achieve superior investment return necessarily involves a risk of
exposure to declining values. Securities in which the Fund primarily may invest
have historically been more volatile than the S&P 500 Index. Accordingly, during
periods when stock prices decline generally, it can be expected that the value
of the Fund may decline more than the market indices. However, on a long-term
basis, Jennison anticipates that the investment return of the Fund should exceed
that of the market indices.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or incidental income purposes, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase and
sell put and call options on securities and stock indices; and (iv) purchase and
sell futures contracts on stock indices and options thereon.
Stock Index Fund. The 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 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 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 "The Funds--Stock Index
Fund" in the Statement of Additional Information regarding certain additional
disclaimers and limitations of liability on behalf of S&P.
Traditional methods of security analysis will not be used in connection with the
management of this Fund by PIC, the Adviser for the Fund, in making investment
decisions. Instead, PIC will use a passive, indexing approach. To achieve its
investment objective, the Fund will purchase equity securities that as a group
reflect the price and yield performance of the S&P 500 Index. The Fund intends
to purchase all 500 stocks included in the S&P 500 Index in approximately the
same proportions as they are represented in the S&P 500 Index. In addition, from
time to time adjustments may be made in the Fund's holdings due to changes in
the composition of the S&P 500 Index or due to receipt of distributions of
securities of companies spun off from S&P 500 companies. The Fund will not adopt
a temporary defensive investment posture in times of generally declining market
conditions, and investors in the Fund, therefore, will bear the risk of such
market conditions.
PIC believes that this investment approach will provide an effective method of
tracking the performance of the S&P 500 Index. Nevertheless, PIC does not expect
that the Fund's performance will precisely correspond to the performance of the
S&P 500 Index. The Fund will attempt to achieve a correlation between its
performance and that of the S&P 500 Index of at least 0.95, without taking into
account expenses. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Fund's net asset value, including the value of
its dividends and capital gains distributions, increases or decreases in exact
proportion to changes in the S&P 500 Index. PIC will, of course, attempt to
minimize any tracking differential (i.e., the statistical measure of the
difference between the investment results of the Fund and those of the S&P 500
Index). Tracking will be monitored at least on a monthly basis. All tracking
maintenance activities will be reviewed regularly to determine whether any
changes in policies or techniques are necessary. However, in addition to
potential tracking differences, brokerage and other transaction costs, as well
as other Fund expenses, may cause the Fund's return to be lower than the return
of the S&P 500 Index. Consequently, there can be no assurance as to how closely
the Fund's performance will correspond to the performance of the S&P 500 Index.
The Fund intends that at least 80% of the value of its total assets will be
invested in securities included in the S&P 500 Index. The Fund may invest the
balance of its assets in: (i) other equity-related securities; (ii) obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities;
(iii) put and call options on securities and stock indices; and (iv) futures
contracts on stock indices and options thereon.
6 The Prudential Institutional Fund Prospectus
<PAGE>
Options, futures contracts, and options on futures contracts are used, if at
all, primarily to invest uncommitted cash balances, to maintain liquidity to
meet redemptions, to facilitate tracking, to reduce transaction costs or to
hedge the Fund's portfolio.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement purposes, the Fund may also:
(i)enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; and (ii) lend its portfolio securities.
International Stock Fund. The International Stock Fund seeks to achieve
long-term growth of capital through investment in equity securities of foreign
companies. Income is a secondary objective. The Fund will, under normal
circumstances, invest at least 65% of the value of its total assets in common
stocks and preferred stocks of issuers located in at least three foreign
countries. The Fund will invest primarily in seasoned companies (i.e., companies
with an established operating record of 3 years or greater) that are
incorporated, organized, or that do business primarily outside the United
States. The Fund will invest in securities of such foreign issuers through
direct market purchases on foreign stock exchanges and established
over-the-counter markets as well as through the purchase of American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") or other similar
securities.
The Fund intends to broadly diversify its holdings among issuers located in
developed and developing countries having national financial markets. Mercator,
the Adviser for the Fund, believes that broad diversification provides a prudent
means of reducing volatility while permitting the Fund to take advantage of the
potentially different movements of major equity markets. While the Fund may
invest anywhere outside the United States, it expects that most of its
investments will be made in securities of issuers located in developed countries
in North America, Western Europe, and the Pacific Basin. In allocating the
Fund's investments among different countries and geographic regions, Mercator
will consider such factors as relative economic growth, expected levels of
inflation, government policies affecting business conditions, and market trends
throughout the world. In selecting companies within those countries and
geographic regions, Mercator seeks to identify those companies that are best
positioned and managed to benefit from the factors listed above.
Investing in securities of foreign issuers generally involves greater risks than
investing in the securities of domestic companies. These risks are often
heightened for investments in emerging or developing countries. The Fund does
not currently expect to invest 25% or more of its net assets in any one country.
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in common stocks, preferred stocks and other equity-related securities of U.S.
issuers.
The Fund may invest up to 35% of the value of its total assets in: (i) other
equity-related securities of foreign issuers; (ii) common stocks, preferred
stocks and other equity-related securities of U.S. issuers; (iii) investment
grade debt securities of domestic and foreign corporations, governments,
governmental entities, and supranational entities (such as the Asian Development
Bank, the European Coal and Steel Community, the European Economic Community,
and the International Bank for Reconstruction and Development (the "World
Bank")); and (iv) invest in high-quality domestic money market instruments and
short-term fixed income securities. The Fund's use of money market instruments
and short-term debt securities generally will reflect Mercator's overall measure
of optimism relating to the global equity markets, and the Fund will use such
securities to reduce downside volatility during uncertain or declining market
conditions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement purposes, the Fund
may: (i) enter into repurchase agreements, when-issued, delayed-delivery and
forward commitment transactions; (ii) lend its portfolio securities; and (iii)
purchase and sell put and call options on any securities in which it may invest
and options on any securities index based on securities in which the Fund may
invest. In order to attempt to reduce risks associated with currency
fluctuations, the Fund may (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and currency forward contracts; and
(iii) purchase and sell put and call options on currencies and on foreign
currency futures contracts.
Active Balanced Fund. The objective of this Fund is to seek to achieve total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities, and money market instruments.
Jennison, the Adviser to the Fund, uses the following ranges as the normal
operating parameters for the securities to be purchased by the Fund: (i) 40-75%
of the total assets of the Fund will be invested in common stocks, preferred
stocks and other equity-related securities; (ii) 25-60% of the total assets of
the Fund will be invested in investment grade fixed income securities; and (iii)
0-35% of the total assets of the Fund will be invested in money market
instruments. Within these parameters, at least 25% of the Fund's total assets
will be invested in fixed income senior securities.
Unlike the Balanced Fund discussed below, the Active Balanced Fund's investments
will actively be shifted among these asset classes in order to capitalize on
intermediate term (i.e., 12 to 18 months) valuation opportunities and to
maximize the Fund's total investment return. The equity component of this Fund
will be invested in the common stocks, preferred stocks and other equity-related
securities of companies that are expected to generate superior earnings growth
or are attractively valued. The fixed income component of this Fund will be
invested primarily in fixed income securities rated "A" or better by Moody's or
S&P or, if not rated, determined by Jennison to be of comparable quality to
securities so rated. However, the Fund also may invest up to 20% of the fixed
income portion of its portfolio in securities rated Baa/BBB (or the equivalent
rating of another NRSRO) or, if not rated, determined by Jennison to be of
comparable quality to securities so rated. The weighted average maturity of the
fixed income component of the Fund will normally be between 5 and 25 years.
Under normal market conditions at least 65% of the value of the Fund's total
assets will be invested according to the above allocations. Within these
allocations, the Fund's assets may be invested as follows: (i) up to 15% of the
Fund's total assets, in common stocks, preferred stocks and other equity-related
securities of foreign issuers; (ii) up to 20% of the Fund's total assets, in
investment grade fixed income securities of foreign issuers; (iii) in
mort-
The Prudential Institutional Fund Prospectus 7
<PAGE>
gage-backed securities; (iv) in custodial receipts and asset-backed securities;
and (v) in obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase and
sell put and call options on securities, stock indices and interest rate
indices; (iv) purchase and sell futures contracts on stock indices and interest
rate indices and options thereon and (v) purchase and sell futures contracts on
securities.
The Fund also may: (i) purchase and sell currency spot contracts; (ii) purchase
and sell currency futures contracts and currency forward contracts; and (iii)
purchase and sell put and call options on currencies and on foreign currency
futures contracts in each case to attempt to reduce risks associated with
currency fluctuations.
Balanced Fund. The Balanced Fund seeks to realize long-term total return
consistent with moderate portfolio risk. To achieve its objective, the Balanced
Fund will allocate at least 65% of its total assets among (i) common stocks,
preferred stocks and other equity-related securities (including ADRs); (ii)
investment grade fixed income securities with a weighted average maturity of 10
years or less, and (iii) high-quality money market instruments and other
short-term investment grade debt securities.
PIC will adjust the mix of investments among these three asset categories to
capitalize on perceived variations in the potential for return resulting from
the interaction of changing economic and financial market conditions, taking
into consideration the risks associated with each type of security. PIC uses the
following ranges as the normal operating parameters for each type of security to
be purchased for the Fund: (i) 25-50% of the Fund's total assets will be
invested in common stocks, preferred stocks and other equity-related securities
(including ADRs); (ii) 30-60% of the Fund's total assets will be invested in
investment grade fixed income securities with a weighted average maturity of 10
years or less; and (iii) 0-45% of the Fund's total assets will be invested in
money market instruments. Within these parameters, at least 25% of the Fund's
total assets will be invested in fixed income senior securities. The equity
portion of the Fund will be invested using an approach that combines a value
orientation to stock valuations with an in-depth analysis of individual
companies. Stock prices will be evaluated relative to a company's profitability,
estimated earnings growth, quality of management and other factors such as
underlying asset value and the presence of problems that are believed to be
temporary. While the majority of the Fund's holdings are expected to be in
larger, well-established companies, the Fund also may invest in the equity
securities of smaller companies. Adjustments to the investment mix of the
Balanced Fund normally will be made in a gradual manner over a period of time,
depending on market and economic conditions.
The Fund also may invest up to 35% of the value of its total assets in:
(i) common stocks, preferred stocks and other equity-related securities of
foreign issuers not traded in the U.S. or denominated in U.S. dollars;
(ii) investment grade fixed income securities of foreign issuers;
(iii) mortgage-backed securities; (iv) custodial receipts and asset-backed
securities; and (v) obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement purposes, the Fund
may: (i) purchase and sell put and call options on securities, stock indices and
interest rate indices; (ii) purchase and sell futures contracts on securities,
stock indices and interest rate indices, and (iii) enter into interest rate swap
transactions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement, the Fund may also: (i) enter
into repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (ii) lend its portfolio securities. With respect to the equity
component of the Fund's total assets, the Fund also may: (i) purchase and sell
currency spot contracts; (ii) purchase and sell currency futures contracts and
currency forward contracts; and (iii) purchase and sell put and call options on
currencies and on foreign currency futures contracts in each case to attempt to
reduce risks associated with currency fluctuations.
Income Fund. The Income Fund seeks a high level of income over the longer term
while providing reasonable safety of capital by investing in securities with a
low level of default risk, with the effect of seeking preservation of capital.
To achieve its objective, the Fund will invest, under normal circumstances, at
least 65% of the value of its total assets in fixed income securities. Such
securities include: (i) corporate debt obligations; (ii) mortgage-backed
securities; (iii) custodial receipts and asset-backed securities; (iv) U.S.
Government obligations (such as U.S. Treasury bills, notes and bonds), and
securities issued by its agencies or its instrumentalities; and (v) U.S.
dollar-denominated investment grade fixed income securities of foreign issuers.
The Fund will invest primarily in fixed income securities rated "A" or better by
Moody's or S&P (or the equivalent rating of another NRSRO) or, if not rated,
determined by PIC to be of comparable quality to securities so rated. However,
the Fund may also invest up to 20% of its portfolio in securities rated Baa/BBB
or above (or the equivalent rating of another NRSRO) or, if not rated,
determined by PIC to be of comparable quality to securities so rated.
The Fund has no maturity restrictions. However, PIC anticipates that the
securities in which the Fund will invest will primarily be intermediate to
long-term debt securities having an average maturity of between 5 and 20 years.
Movements in interest rates typically have a greater effect on the price of
longer-term bonds than shorter-term bonds. Normally, the value of the Fund's
investments will vary inversely with changes in interest rates. As interest
rates rise, the value of the Fund's investments will tend to decline and, as
interest rates fall, the value of the Fund's investments will tend to increase.
8 The Prudential Institutional Fund Prospectus
<PAGE>
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental yield enhancement purposes, the Fund
may also: (i) purchase and sell put and call options on securities and interest
rate indices; (ii) purchase and sell futures contracts on securities, securities
indices and interest rate indices; and (iii) enter into interest rate swap
transactions, caps, collars and floors. To facilitate the Fund's investment
program, the Fund may also purchase and sell non-U.S. dollar denominated
investment grade fixed income securities of foreign issuers.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, the Fund may also: (i) enter into
repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (ii) lend its portfolio securities.
Money Market Fund. The Money Market Fund seeks to achieve high current income,
preservation of principal, and maintenance of liquidity. To achieve its
objectives, the Fund will invest in a diversified portfolio of high-quality
domestic and U.S. dollar-denominated foreign money market instruments that
present minimal credit risks and which, at the time of acquisition, are eligible
securities. Eligible securities include securities or issuers of securities
rated in one of the two highest credit categories for short-term debt
obligations assigned by any two NRSROs, or by one NRSRO, if only one has rated
the money market securities ("Requisite NRSROs") or, if unrated, are of
comparable investment quality. The Money Market Fund will invest at least 95% of
its total assets in eligible securities that are rated within the highest rating
category for short-term debt obligations by the Requisite NRSROs or unrated
securities of comparable investment quality. The Fund may also invest up to 50%
of the value of its total assets in U.S. dollar-denominated short-term
securities of foreign issuers.
The eligible money market securities in which the Fund may invest include: (i)
short-term obligations of the U.S. Government, its agencies, and
instrumentalities; (ii) short-term obligations of banks and savings and loan
associations, including certificates of deposit, banker's acceptances, and time
deposits; (iii) short-term corporate obligations, including notes and bonds with
remaining maturities of 397 days or less; (iv) commercial paper (unsecured
promissory notes having maturities of 9 months or less) issued by corporations
and finance companies; (v) repurchase agreements; and (vi) U.S.
dollar-denominated obligations of foreign issuers. Certain of these money market
securities may have adjustable rates of interest with periodic demand features.
The Fund will invest in eligible money market securities maturing in 397 days or
less and will maintain a dollar-weighted average portfolio maturity of 90 days
or less. These practices are designed to minimize any price fluctuation in the
Fund's portfolio securities. The Fund seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not be
possible.
PIC will actively manage the Fund, adjusting the composition of investments and
the average maturity of the Fund's portfolio according to its outlook for
short-term interest rates. During periods of rising interest rates, a shorter
average maturity may be expected, while a longer maturity may be more
appropriate when interest rates are falling.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, the Fund may (i) enter into repurchase
agreements, when-issued, delayed-delivery and forward commitment transactions
and (ii) lend its portfolio securities.
Risk Factors and Investment Practices and Policies of the Funds. As discussed
above under the section entitled "The Funds", an investment in each Fund is
subject to certain risks as a result of the particular investment practices and
policies followed by the Fund. For a fuller description of the types of
securities in which each of the Funds may invest, the investment techniques each
Fund may employ and the risks associated with these investments and techniques,
see the section entitled "Other Investment Practices, Risk Conditions and
Policies of the Funds" below and "Other Investment Practices, Risk Conditions
and Policies of the Funds" in the Statement of Additional Information.
The Prudential Institutional Fund Prospectus 9
<PAGE>
================================================================================
MANAGEMENT OF THE COMPANY
The Manager. Prudential Institutional Fund Management, Inc. (the "Manager") 30
Scranton Office Park, Moosic, Pennsylvania, 18507-1789 is the Manager of the
Company. The Manager is an indirect wholly-owned subsidiary of The Prudential,
one of the largest diversified insurance and financial services institutions in
the world. The Manager was incorporated on May 6, 1992 under the laws of the
Commonwealth of Pennsylvania. See "The Manager and Advisers" in the Statement of
Additional Information.
Subject to the supervision and direction of the Company's Trustees (the
"Trustees"), the Manager provides a continuous investment program for the
Company, monitors each Adviser's investment performance, and evaluates and
recommends whether each Adviser's contract should be renewed, modified, or
terminated. The Manager also supervises all matters relating to the Company's
operations and business affairs and may provide certain of the special
processing services described below.
Each Fund pays the Manager a fee for its services provided to the Fund that is
computed daily and paid monthly. For the year ended September 30, 1995, the
Manager was paid a management fee at the annual rate specified below, expressed
as a percentage of the Fund's average daily net assets:
Management Fee
Fund (Before Reduction)
- -----------------------------------------------------------
Growth Stock Fund .70%
- -----------------------------------------------------------
Stock Index Fund .40%
- -----------------------------------------------------------
International Stock Fund 1.15%*
- -----------------------------------------------------------
Active Balanced Fund .70%
- -----------------------------------------------------------
Balanced Fund .70%
- -----------------------------------------------------------
Income Fund .50%
- -----------------------------------------------------------
Money Market Fund .45%
- -----------------------------------------------------------
- ----------
* The Management Fee paid by the International Stock Fund is higher than that
charged to most investment companies.
The Manager may hereafter agree, from time to time, to further waive or modify
any waiver of its management fee and subsidize certain operating expenses of a
Fund.
The Advisers. The Manager has entered into Sub-Advisory Agreements (the
"Advisory Agreements") with PIC, Jennison and Mercator under which each
furnishes investment advisory services in connection with the management of the
various Funds. The Manager (not the Funds) compensates each Adviser for its
services. Under the Advisory Agreements, each Adviser, subject to the
supervision of the Manager and the Trustees, is responsible for managing the
assets of the respective Funds in accordance with their investment objectives,
investment programs, and policies. Each Adviser determines what securities and
other instruments are purchased and sold for its respective Fund and is
responsible for obtaining and evaluating financial data relevant to each Fund.
The Prudential Investment Corporation, 751 Broad Street, Newark, New Jersey
07102, serves as Adviser to the Stock Index Fund, the Balanced Fund, the Income
Fund, and the Money Market Fund. PIC also invests available cash balances for
all of the Funds which it may do through a joint repurchase agreement account.
The Manager reimburses PIC for the reasonable costs and expenses it incurs in
providing services to the Funds.
Prudential Diversified Investment Strategies (PDI Strategies), a unit of PIC, is
responsible for the asset allocation and overall management of the Balanced Fund
and for the day-to-day management of the Stock Index Fund. PDI Strategies
employs a team approach to the management of the Balanced Fund and has managed
the portfolio of the Fund since its commencement. Roger E. Ford, a Managing
Director of PIC, has had responsibility for the day-to-day portfolio management
of the equity portion of the Balanced Fund portfolio since February, 1995. Mr.
Ford has been employed by PIC as a portfolio manager since 1972. Kay T. Willcox,
Managing Director and Senior Portfolio Manager of Prudential Global Advisors, a
unit of PIC, has had responsibility for the day-to-day portfolio management of
the bond portion of the Balanced Fund since February, 1995. Ms. Willcox has been
a portfolio manager at PIC since 1987.
Prudential Global Advisors is also responsible for the day-to-day management of
the Income Fund and Money Market Fund. With respect to the Income Fund, Ms.
Willcox is responsible for the day-to-day portfolio management and has managed
the Income Fund since November, 1993.
PIC, a wholly-owned subsidiary of The Prudential, is a registered investment
adviser and a New Jersey corporation. PIC serves as adviser to institutional
investors, including The Prudential, and various other mutual funds.
Jennison Associates Capital Corp., 466 Lexington Avenue, New York, New York
10017, serves as Adviser to the Growth Stock Fund and the Active Balanced Fund.
The Manager compensates Jennison for its services at the annual rate of 0.30 of
1% of the Fund's average daily net assets.
David Poiesz, a Director and Senior Vice President of Jennison, is responsible
for the day-to-day portfolio management of the Growth Stock Fund. Mr. Poiesz has
managed the portfolio of the Growth Stock Fund since its inception in November,
1992. Mr. Poiesz joined Jennison in 1983 and has been an equity portfolio
manager since 1991.
Bradley L. Goldberg, a Director and Executive Vice President of Jennison, is
responsible for the day-to-day portfolio management of the Active Balanced Fund.
Mr. Goldberg has managed the portfolio of the Active Balanced Fund since its
inception in January 1993 and has been employed as an equity manager with
Jennison since 1974.
Jennison, a wholly-owned subsidiary of The Prudential, is a registered
investment adviser and a New York corporation with $29 billion in assets under
management, as of December 31, 1995. Jennison serves as adviser to various
institutional investors and other mutual funds.
Mercator Asset Management, L.P., 2400 East Commercial Boulevard, Fort
Lauderdale, Florida 33308, serves as Adviser to the International Stock Fund.
The Manager compensates Mercator for its services at an annual rate of 0.75 of
1% of the Fund's average daily net assets up to $50 million, 0.60 of 1% of the
Fund's average daily net assets between $50 million and $300 million and 0.45 of
1% of average daily net assets in excess of $300 million.
Peter F. Spano is responsible for the day-to-day management of the portfolio of
the International Stock Fund. Mr. Spano has managed the portfolio of
10 The Prudential Institutional Fund Prospectus
<PAGE>
the International Stock Fund since its inception in November, 1992 and has been
employed as a portfolio manager with Mercator since its founding in 1984.
Mercator is a registered investment adviser and a Delaware limited partnership
with $1.8 billion in assets under management as of December 31, 1995. Mercator's
general partners are four Florida corporations: JZT Corp., KXB Corp., TXB Corp.,
and MXW Corp. Mercator's limited partner is The Prudential Asset Management
Company, Inc., a wholly-owned indirect subsidiary of The Prudential. John G.
Thompson, Peter F. Spano, Kenneth B. Brown, and Michael A. Williams are the sole
shareholders of JZT Corp., PXS Corp., KXB Corp. and MXW Corp., respectively. The
address of each of the general partners is 2400 East Commercial Blvd., Suite
810, Fort Lauderdale, Florida 33308. Mercator serves as adviser to various
institutional investors and mutual funds.
The Administrator, Transfer Agent and Dividend Disbursing Agent. The Company has
entered into an administration, transfer agency and service agreement (the
"Administration Agreement"), with Prudential Mutual Fund Management, Inc.
("PMF"), One Seaport Plaza, New York, New York, 10292, which provides that PMF,
a Delaware corporation and an indirect wholly-owned subsidiary of The
Prudential, furnishes to the Company such services as the Company may require in
connection with administration of the Company's business affairs. Under the
Administration Agreement, the Company pays PMF a monthly fee at an annual rate
of .17% of the average daily net assets of the Company up to $250 million and
.15% of the Company's average daily net assets in excess of $250 million. PMF
also provides the Company with transfer agent and dividend disbursing services
for no additional fee, through its wholly-owned subsidiary, Prudential Mutual
Fund Services, Inc. ("PMFS" or "Transfer Agent"), Raritan Plaza One, Edison, New
Jersey 08837. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMF reimburses PMFS for certain of the out-of-pocket expenses PMFS
incurs in providing these services and the Company reimburses PMF for those
out-of-pocket expenses.
The Distributor. Prudential Retirement Services, Inc. (the "Distributor"), 751
Broad Street, Newark, New Jersey 07102, an affiliate of the Manager and a
corporation organized under the laws of New Jersey, has entered into a
Distribution Agreement (the "Distribution Agreement") with the Company pursuant
to which it serves as the Distributor of the Company's shares. Potential
investors may be introduced to the Distributor, and persons who introduce
investors may be compensated by the Distributor for such introductions.
The Prudential Institutional Fund Prospectus 11
<PAGE>
================================================================================
INVESTORS GUIDE TO SERVICES
Investment in the Company and Special Processing. As an institutional fund,
shares are offered exclusively to retirement programs and arrangements
("Programs") through their plan sponsors, to Individual Retirement Accounts
("IRAs") and to certain institutional investors. Sponsors of a Program or their
agents are referred to as "Program Sponsor(s)" or "Program Administrator(s)" and
individual employees participating in a Program are referred to as
"Participant(s)," and individual investors who separate from a program are
referred to as "Continuing Participant(s)." Endowments, foundations, insurance
companies and other institutional investors are referred to as "Other
Institutional Investors". The term "shareholders" refers to each or all of these
categories as well as to IRAs, as appropriate.
Investments by Participants are made through their Program Sponsor's
recordkeeper, who is responsible for transmitting all orders for the purchase,
redemption or exchange of Company shares. The availability of each Fund and the
procedures for investing depend upon the provisions of the Program and whether
the Program Sponsor has contracted with the Company or the Transfer Agent for
special processing services, including subaccounting. Continuing Participants,
Other Institutional Investors and IRA investors must arrange for services
through Prudential Institutional Fund Management, Inc., the Manager, by
contacting them at 30 Scranton Office Park, Moosic, PA 18507-1789. The following
services are offered specifically to sponsors of qualified retirement programs.
Purchasing Shares. Shares of a Fund may be purchased through a Program Sponsor's
recordkeeper or directly from the Transfer Agent. The purchase price for shares
of a Fund will be the net asset value per share next determined following
acceptance of a purchase order by the Program Sponsor's recordkeeper or PMFS. In
order for a purchase order to be accepted, it must include the information
necessary to determine the proper share allocation for each Participant. In
addition, the Manager may determine, at its own discretion, to require the
Program Sponsor's recordkeeper to deliver to PMFS the funds for initial
investment prior to accepting any purchase order. Plans should determine, prior
to investing in the Funds, whether the Manager will require the delivery of
funds for the initial investment prior to accepting a purchase order. The
Company reserves the right to reject any purchase order (including an exchange
order) or to suspend or modify the continuous offering of its shares.
The Program Sponsor and its recordkeeper and PMFS are responsible for forwarding
payment promptly to the Company. Except where funds are received prior to the
opening of the account, the Company reserves the right to cancel any purchase
order for which payment has not been received by the fifth business day
following the investment. On behalf of the Company, the Manager, in its sole
discretion, may require assurances from the Program Sponsor and its recordkeeper
concerning timely payment of funds and payment of damages for failure to deliver
funds and purchase orders on a timely basis.
The Company also may determine to accept eligible securities as payment for a
Program's initial investment in a Fund. Eligible securities include any security
that a Fund has authority to purchase, consistent with its investment
restrictions and operating policies as set forth in this Prospectus and the
Statement of Additional Information, and that the Company otherwise agrees to
accept. Acceptance of such securities is at the absolute discretion of the
Company, and the Company may refuse to accept any securities at any time.
Eligible securities are valued using the same methods the Fund uses to value its
portfolio securities, except that applicable stock transfer taxes, if any, may
reduce the amount exchanged. The exchange of securities by the investor pursuant
to this offer will constitute a taxable transaction and may result in a gain or
a loss for federal income tax purposes.
Redemptions. Requests to redeem shares where the proceeds are not immediately
invested in shares of another Fund (see the section entitled "Exchange
Privilege" below) must be made in writing (or by such other means as agreed upon
in advance by the Program Sponsor's recordkeeper and the Program Administrator)
to the Program Sponsor's recordkeeper. Requests for the redemption of shares are
considered received when all required information and any necessary signatures
have been provided. The Company generally will redeem for cash all full and
fractional shares. The redemption price is the net asset value per share next
determined after receipt by the Company of proper notice of redemption. The
payment of redemption proceeds will be made by check (or at the discretion of
the Program Recordkeeper, by electronic credit to the Participant's account at a
financial institution). Unless extraordinary circumstances exist, the payment of
proceeds will be made within seven days of the receipt of the request for
redemption. The Company has reserved the right to redeem shares in excess of
$250,000 or 1% of the net asset value of each Fund during any 90-day period for
any one shareholder by "distribution in kind" of securities (instead of cash)
from such Funds. The Company does not intend to exercise this right except in
special circumstances when it determines that it is in the interest of the
Company and its shareholders. Redemption in kind is not as liquid as cash
redemption. If redemption is made in kind, shareholders receiving portfolio
instruments and selling them before their maturity could receive less than the
redemption value of their securities and the redeeming shareholder will incur
transaction costs from disposing of such securities. The right of redemption may
be suspended under unusual circumstances, as permitted by law. If shares to be
redeemed were purchased with clearing house funds, the Company reserves the
right to delay payment until it is reasonably sure the funds have been credited
to its account. If shares were purchased by personal, corporate, or U.S.
government check, proceeds may be delayed until the check has been honored, but
in no event more than 15 calendar days from the date of receipt of the check.
This procedure does not apply to shares purchased by wire payment. Prior to the
time the redemption is effective, dividends on such shares will accrue and be
payable, and you will be entitled to exercise all other rights of beneficial
ownership.
Exchange Privilege. Shares of each Fund may be exchanged for shares of any other
available Fund (depending upon the provisions of the Program) by written,
facsimile, telecopy, telephone or electronic exchange request through the
Program's recordkeeper at the net asset value next determined after receipt by
the Transfer Agent or the Program Sponsor's recordkeeper of an exchange request
in good order. Exchanges are
12 The Prudential Institutional Fund Prospectus
<PAGE>
currently permitted at no charge, subject to any minimum investment
requirements, or any general limitations of the Fund into which an exchange is
sought. Currently, there are no such requirements or limitations. The exchange
privilege may be modified or withdrawn by the Company upon 60 days' notice to
shareholders.
Signatures. When a Program provides that redemption may only be made by written
request, the signature on a written redemption request must be exactly as shown
on the enrollment form. In addition to a Program Participant's signature, a
written request must include all other signatures required by the Program and
federal law.
Telephone Requests. Certain Programs may allow participants to effect exchanges
and other Fund transactions by telephone and telecopy. If the Program offers
such telephone and telecopy privileges, each Program participant will
automatically receive such privileges unless he or she declines those privileges
on a form that will be supplied by the Program Sponsor or Program Recordkeeper.
For the participant's protection and to prevent fraudulent exchanges, telephone
calls will be recorded and the participant will be asked to provide his or her
personal identification number or other identifying information. A written
confirmation of an exchange transaction will be sent to the participant. 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. (The Fund or its agents could be subject to liability
if they fail to employ reasonable procedures.) All exchanges will be made on the
basis of the relative net asset value of the two Funds next determined after the
request is received in good order. Telephone and telecopy privileges are
available only if the Program Sponsor has so elected and only in states where
these privileges may legally be offered. The safeguards discussed above that are
employed by each Fund are designed to minimize unauthorized exercise of these
privileges. During time of extraordinary economic or market changes, telephone
privileges or telecopied instructions may be difficult to implement.
Other Services
-- Reinvestment of Distributions. Income dividends and capital gain
distributions with respect to a particular Fund are declared in cash and
automatically reinvested in additional shares of that Fund. Shares of each
Fund, including shares received as dividends and other distributions, may
be redeemed for cash at any time. See "Investors Guide to Services" below
for a further description of share redemptions.
-- Systematic Withdrawal Plan. A Systematic Withdrawal Plan may be established
by a Program Administrator subject to the requirements of its Program,
federal tax laws, and the Company's applicable procedures. The
shareholder's interest in each Fund designated for systematic withdrawals
or in other programs for which the Manager or its affiliates act as
investment manager, must have a minimum value of $5,000 when the Systematic
Withdrawal Plan begins, unless used for the purpose of satisfying minimum
distribution rules. The proceeds from scheduled redemption of shares are
forwarded to the shareholder on a monthly, quarterly, semi-annual or annual
basis. Payments are in equal dollar amounts and must be at least $250. A
fee may be charged for accommodating wire transfer requests. For the
protection of shareholders and the Company, wiring instructions must be on
file prior to executing any request for the wire transfer of systematic
withdrawal proceeds. A shareholder may change the bank account previously
designated by written request, including appropriate signature guarantees,
a copy of any applicable corporate resolution or other relevant
documentation.
- --------------------------------------------------------------------------------
FURTHER INFORMATION REGARDING THESE SERVICES MAY BE OBTAINED FROM A SERVICE
REPRESENTATIVE. EACH OF THESE SERVICES IS SUBJECT TO THE REQUIREMENTS AND
LIMITATIONS OF THE PROGRAM AND MAY HAVE TAX CONSEQUENCES THAT DEPEND ON THE
INDIVIDUAL TAX STATUS OF THE RECIPIENT.
================================================================================
OTHER CONSIDERATIONS
Net Asset Value. The net asset value for each Fund is determined by subtracting
from the value of all securities, cash and other assets of each Fund, the amount
of its liabilities (including accrued expenses and dividends payable), and
dividing the result by the number of outstanding shares of that Fund. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The Trustees have fixed the specific time
of day for the computation of the net asset value of all the Funds (except the
Money Market Fund) to be as of 4:15 p.m., New York time. The Money Market Fund
calculates net asset value as of 4:30 p.m., New York time.
Fund securities and other assets are valued based on market quotations, or, if
not readily available, at fair market value as determined in good faith under
procedures established by the Company's Trustees. See "Other Considerations--Net
Asset Value" in the Statement of Additional Information.
Each Fund computes its net asset value once daily on business days. Business
days are days when the NYSE is open for trading except on days on which no
orders to purchase, sell, or redeem shares have been received by the Company or
days on which changes in the value of the Company's portfolio securities do not
affect net asset value. The NYSE is closed on the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
The Money Market Fund determines the value of its portfolio securities by the
amortized cost method. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Fund would receive if it sold
the instrument. During these periods, the yield to an existing shareholder may
differ somewhat from that which could be obtained if the Fund marked its
portfolio securities to market each day. The Trustees have established
procedures designed to stabilize, to the extent reasonably possible, the net
asset value of the shares of the Money
The Prudential Institutional Fund Prospectus 13
<PAGE>
Market Fund at $1.00 per share. The Money Market Fund seeks to maintain a $1.00
share price at all times although there can be no assurance that the Fund will
do so. To achieve this, the Money Market Fund purchases only securities with
remaining maturities of thirteen months or less and limits the dollar-weighted
average maturity of its portfolio to 90 days or less. The Money Market Fund
cannot guarantee a $1.00 share price, but the Fund's maturity standards and
investments solely in high quality money market instruments minimize any price
decreases or increases.
Portfolio Transactions. It is expected that Prudential Securities Incorporated
("PSI"), a registered broker-dealer, which is an indirect wholly-owned
subsidiary of The Prudential, may act as broker for the Company, in conformity
with the securities laws and rules thereunder. In order for PSI to effect any
portfolio transactions for the Company on an exchange or board of trade, the
commissions received by PSI must be reasonable and fair compared to the
commissions paid to other brokers in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
or board of trade during a comparable period of time. This standard would allow
PSI to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. The Trustees have approved procedures for
evaluating the reasonableness of commissions paid to PSI and periodically
reviews these procedures.
Distributions. Dividends and other distributions of each Fund are declared in
cash and automatically reinvested in additional shares of the Fund. While
shareholders may not elect to receive dividends and other distributions in cash,
the same effect may be achieved at any time by redeeming shares of the Fund. The
Income Fund and Money Market Fund expect to declare dividends of their net
investment income and, for the Money Market Fund, net short-term capital gains,
and losses, daily and to distribute such dividends monthly. Each other Fund
expects to declare and distribute a dividend of its net investment income, if
any, at least annually. Except for the Money Market Fund, each Fund expects to
declare and distribute its net capital gains (the excess of net long-term
capital gain over net short-term capital loss) and net short-term capital gain,
if any, at least annually. Distributions of income dividends and capital gains
distributions of each Fund are made on the payment date and reinvested at the
per share net asset value as of the record date or such other date as the Board
may determine. On the "ex-dividend" date, the net asset value per share excludes
the dividend (i.e., is reduced by the amount of the distribution).
Taxes. The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, its Funds and its shareholders. For
further tax-related information see "Other Considerations--Taxes" in the
Statement of Additional Information. No attempt is made to present a detailed
explanation of all federal, state, and local income tax considerations, and this
discussion (as well as that in the Statement of Additional Information) is not
intended as a substitute for careful tax planning. Accordingly, investors are
urged to consult their own tax advisors with specific reference to their own tax
situation.
Tax Consequences to the Funds. Each Fund is treated as a separate entity for
federal income tax purposes, and thus the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable to regulated investment
companies generally are applied to each Fund separately, rather than to the
Company as a whole. Each Fund has elected to qualify and intends to remain
qualified as a regulated investment company under the Code. If so qualified,
each Fund is not subject to federal income taxes with respect to net investment
income and net realized capital gains, if any, that are distributed to its
shareholders, provided that the Fund distributes each year at least 90% of its
net investment income, (including net short term capital gains), and meets
certain other requirements set forth in the Code. Each Fund would be subject to
a 4% nondeductible excise tax on such Fund's taxable income to the extent such
Fund did not meet certain distribution requirements by the end of each calendar
year. Each Fund intends to make sufficient distributions to avoid application
of this excise tax.
Tax Consequences to the Shareholders. The Company's present intention is to
offer the Funds to qualified retirement programs, Continuing Participants, and
Other Institutional Investors.
Distributions from a qualified retirement program or other non-qualified
arrangements to a Participant or beneficiary will be subject to the provisions
in the Code and Treasury Regulations relating to taxation of such distributions.
Because the effect of these rules varies greatly with individual situations,
potential investors are urged to consult their own tax advisors.
Certain investments of the Funds, such as Passive Foreign Investment Companies
and zero coupon instruments involve special tax issues. The Statement of
Additional Information contains a general discussion of these matters.
Tax Consequences to Non-Exempt Shareholders.
Dividends from a Fund's investment company taxable income (consisting generally
of net investment income, net short-term capital gain and, when applicable, net
gains from foreign currency transactions) are taxable to its shareholders that
are not tax-exempt entities as ordinary income to the extent of the Fund's
earnings and profits. Distributions of a Fund's net capital gains, when
designated as such, are taxable to those shareholders as long-term capital
gains, regardless of the length of time they held their shares.
A portion of the dividends paid by a Fund, even though reinvested in additional
Fund shares, may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate dividends
received by the Fund from U.S. corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax. No dividends
paid by the Income Fund or the Money Market Fund, and only an insignificant part
of the dividends paid by the International Stock Fund, are expected to be
eligible for this deduction.
14 The Prudential Institutional Fund Prospectus
<PAGE>
A redemption of Fund shares will result in taxable gain or loss to a non-exempt
shareholder, depending on whether the redemption proceeds are more or less than
its adjusted basis for the redeemed shares. An exchange of Fund shares for
shares of any other fund generally will have similar tax consequences.
================================================================================
PERFORMANCE AND YIELD
INFORMATION
Money Market Fund. From time to time quotations of the Money Market Fund's
"yield" and "effective yield" may be included in marketing material and
communications to shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
Fund refers to the net income generated by an investment in the Fund over a
specified seven-day period. This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is expressed similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. "Yield" and "effective yield"
for the Fund will vary based on changes in market conditions, the level of
interest rates and the level of the Fund expenses.
From time to time, the average annual total return or cumulative total return of
the Fund may also be included in marketing material and communications to
shareholders. The average annual total return will be calculated as described
below.
Other Funds. From time to time a Fund, other than the Money Market Fund, may
publish its 30-day yield, average annual total return and/or its cumulative
total return in its marketing material and communications to shareholders. The
yield of a Fund will be calculated by dividing the net investment income per
share during a recent 30-day period by the maximum offering price (i.e., net
asset value) per share of the Fund on the last day of the period. The results
are compounded on a bond equivalent (semi-annual) basis and then annualized. A
Fund's average annual total return is determined by computing the annual
percentage change in value of $1,000 invested at the maximum public offering
price (i.e., net asset value) for specified periods ending with the most recent
calendar quarter, assuming reinvestment of all dividends and distributions at
net asset value.
Investors should note that the investment results of a Fund will fluctuate over
time, and any presentation of a Fund's yield or average annual total return for
any prior period should not be considered as a representation of what an
investment may earn or what an investor's yield or total return may be in any
future period. Because the method of calculating yield differs from the methods
used for other accounting purposes, a Fund's yield may not equal the
distributions to shareholders or the income reported in a Fund's financial
statements. See "Performance and Yield Information" in the Statement of
Additional Information for additional performance and yield information. The
Fund also may publish other measurements of return including calculating return
that is not annualized; provided, however, that any non-standardized measures of
return will be accompanied by the standard return required by the Securities and
Exchange Commission ("SEC").
Performance Information. Comparative performance information may be used from
time to time in advertising the Company's shares, including, but not limited to,
data from Lipper Analytical Services, Inc., the Standard & Poor's 500 Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Dow Jones Industrial
Average, the Donoghue Money Market Averages, Morningstar, Inc., the Salomon
Brothers 1-3 years Treasury Index, the Morgan Stanley EAFE Index, the Lehman
Brothers Aggregate Index or Government/Corporate Index and other commonly used
indices or industry publications. The Fund's annual report to Shareholders for
its fiscal year ended September 30, 1995 contains additional performance
information and may be obtained by prospective investors without cost.
================================================================================
OTHER INVESTMENT PRACTICES,
RISK CONDITIONS, AND POLICIES
OF THE FUNDS
The investment objective(s) of each Fund are fundamental. Fundamental
objectives, policies and restrictions may be changed only with the approval of a
"majority of the outstanding voting securities" of that Fund. Each Fund's
investment program, unless otherwise specified, is not fundamental and may be
changed by the Board without shareholder approval. A "majority of the
outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding shares. Each Fund's investment program is subject to further
restrictions as described in the Statement of Additional Information.
Each Fund may hold a portion of its assets in money market instruments in
amounts designed to pay expenses, to meet anticipated redemptions, pending
investments or to margin its purchases and sales of futures contracts in
accordance with its objectives and policies. These instruments may be purchased
on a forward commitment, when-issued or delayed-delivery basis. In addition,
each Fund (except for the Stock Index Fund and the Money Market Fund) may for
temporary defensive purposes invest, without limitation, in high-quality money
market instruments. Each Fund, except the Money Market Fund, may also purchase
non-investment grade fixed income securities and retain investment grade fixed
income securities that have been downgraded to non-investment grade provided
that no more than 5% of the Fund's net assets is invested in non-ivestment grade
fixed income securities, which are considered to be high risk securities, i.e.
"junk" bonds. See "Fixed Income Securities" below and "Other Investment
Practices, Risk Conditions, and Policies of the Funds--Fixed Income Securities"
in the Statement of Additional Information for a fuller description of
thesesecurities.
Each Fund, consistent with its investment objective, may invest in one or more
of the types of securities described below and may utilize a variety of
The Prudential Fund Prospectus 15
<PAGE>
the investment techniques described below. These securities and investment
techniques are more fully described in the Statement of Additional Information.
U.S. Government Securities. Each Fund may invest in fixed income securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
Obligations of the U.S. Government consist of various types of marketable
securities issued by the U.S. Treasury, i.e., bills, notes and bonds, and are
direct obligations of the U.S. Government. Obligations of agencies and
instrumentalities of the U.S. Government are not direct obligations of the U.S.
Government and are either: (i) guaranteed by the U.S. Treasury (e.g., Government
National Mortgage Association ("GNMA") mortgage-backed securities); (ii)
supported by the issuing agency's or instrumentality's right to borrow from the
U.S. Treasury at the discretion of the U.S. Treasury (e.g., Federal National
Mortgage Association ("FNMA") Discount Notes); or (iii) supported by only the
issuing agency's or instrumentality's credit (e.g., each of the Federal Home
Loan Banks).
Repurchase Agreements. Each Fund may enter into repurchase agreements, whereby
the seller of a security agrees to repurchase that security from the Fund at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily, and if the value of the instruments
declines, the Fund will require additional collateral. For the Money Market
Fund, the underlying security must either be a U.S. Government security or a
security rated in the highest rating category by the requisite NRSROs and must
be determined to present minimal credit risks. In the event of bankruptcy or
default of certain sellers of repurchase agreements, the Funds could experience
costs and delays in liquidating the underlying security held as collateral and
might incur a loss if such collateral declines in value during this period. Each
Fund may participate in a joint repurchase account managed by PIC.
Equity-Related Securities. Each Fund (except for the Income Fund and the Money
Market Fund) may invest in equity-related securities. Equity-related securities
are common stock, preferred stock, rights, warrants and debt securities or
preferred stock which are convertible or exchangeable for common stock or
preferred stock.
Fixed Income Securities. Fixed income securities are considered high-quality if
they are rated at least AA/Aa by S&P or by Moody's or an equivalent rating by
any NRSRO or, if unrated, are determined to be of comparable investment quality
by the Adviser. High-quality fixed income securities are considered to have a
very strong capacity to pay principal and interest. Fixed income securities are
considered medium quality if they are rated, for example, at least BBB/Baa by
S&P or by Moody's or an equivalent rating by any NRSRO or, if not rated, are
determined to be of comparable investment quality by the Adviser. Medium quality
fixed income securities are regarded as having an adequate capacity to pay
principal and interest. Securities rated in the lowest category of investment
grade debt have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Investment grade fixed income securities are securities rated BBB or better by
S&P or Baa or better by Moody's (or an equivalent rating by any NRSRO) or, if
not rated, are deemed by the Adviser to be of comparable investment quality.
Non-investment grade securities are rated lower than BBB/Baa (or an equivalent
rating by any NRSRO) or, if not rated, are deemed by the Adviser to be of
comparable investment quality and are commonly referred to as high risk or high
yield securities, i.e. "junk" bonds. High yield securities are generally riskier
than higher quality securities and are subject to more credit risk, including
risk of default, and are more volatile than higher quality securities. In
addition, such securities may have less liquidity and experience more price
fluctuation than higher quality securities. See the discussion of corporate bond
ratings in "Description of S&P, Moodys and Duff & Phelps Ratings" in the
Appendix to the Statement of Additional Information.
The maturity of debt securities may be considered long (ten plus years),
intermediate (three to ten years) or short term (three years or less). In
general, the principal values of longer-term securities fluctuate more widely in
response to changes in interest rates than those of shorter-term securities,
providing greater opportunity for capital gain or risk of capital loss. A
decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
Convertible Securities, Warrants and Rights. A convertible security is a bond,
debenture, corporate note, preferred stock or other similar security that may be
converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer within a particular period of
time at a specified price or formula. A warrant or right entitles the holder to
purchase equity securities at a specific price for a specific period of time.
Securities of Foreign Issuers. The International Stock Fund intends to invest
primarily in securities of foreign issuers. In addition, the other Funds may
invest a portion of their assets in fixed income securities and equity
securities of foreign issuers (denominated in either U.S. or foreign currency).
The Money Market Fund may only invest in U.S. dollar-denominated securities of
foreign issuers.
Foreign securities involve certain unique risks. These risks include political
or economic instability in the country of issue, the difficulty of predicting
international trade patterns, the possible imposition of exchange controls and
the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing, and financial reporting standards
comparable to those applicable to domestic companies.
16 The Prudential Institutional Fund Prospectus
<PAGE>
Dividends paid by foreign companies may be subject to withholding and other
foreign taxes that may decrease the net return on such investments as compared
to dividends and interest paid by the U.S. Government or by domestic companies.
There is generally less government regulation of securities exchanges, brokers
and listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation, confiscatory
taxation, or diplomatic developments which could affect investment in those
countries. Finally, in the event of a default of any such foreign fixed income
obligations, it may be more difficult for the Fund to obtain or to enforce a
judgment against the issuers of such securities. If the security is foreign
currency denominated, it may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and costs may be incurred in
connection with conversions between currencies.
Investments in emerging and less developed countries involve exposure to
economic structures that are generally less diverse and mature than in the U.S.
or other developed countries. A developing country can be considered to be a
country which is in the initial stages of its industrialization cycle.
Historically, markets of developing countries have been more volatile than the
markets of developed countries.
With respect to equity securities, each Fund (except for the Money Market Fund)
may purchase ADRs. ADRs are U.S. dollar-denominated certificates issued by a
United States bank or trust company and represent the right to receive
securities of a foreign issuer deposited in a domestic bank or foreign branch of
a United States bank and traded on a United States exchange or in an
over-the-counter market. Generally, ADRs are in registered form. There are no
fees imposed on the purchase or sale of ADRs when purchased from the issuing
bank or trust company in the initial underwriting, although the issuing bank or
trust company may impose charges for the collection of dividends and the
conversion of ADRs into the underlying securities. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since: (i) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs are usually
subject to comparable auditing, accounting, and financial reporting standards as
domestic issuers.
Segregated Accounts. Each Fund will establish a segregated account with its
Custodian in which it will maintain cash, U.S. Government securities or other
liquid high-grade debt obligations equal in value to its obligations in respect
of potentially leveraged transactions including, forward contracts, when-issued
and delayed-delivery securities, repurchase and reverse repurchase agreements,
forward rolls, dollar rolls, futures contracts, written options, options on
futures contracts (unless otherwise covered) and interest rate swaps. The assets
deposited in the segregated account will be marked-to-market daily.
Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements. The Income Fund
and the Balanced Fund may each commit up to 33 1/3% of the value of its total
assets to investment techniques such as dollar rolls, forward rolls and reverse
repurchase agreements. The Growth Stock Fund, Stock Index Fund, International
Stock Fund, Active Balanced Fund and Money Market Fund may each commit up to 20%
of their net assets to these techniques. A forward roll is a transaction in
which a Fund sells a security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase the same or similar
security from the institution at a later date at an agreed upon price. With
respect to mortgage-related securities, such transactions are often called
"dollar rolls." In dollar roll transactions, the mortgage-related securities
that are repurchased will bear the same coupon rate as those sold, but generally
will be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the roll period, the Fund forgoes principal
and interest paid on the securities and is compensated by the difference between
the current sales price and the forward price for the future purchase as well as
by interest earned on the cash proceeds of the initial sale. A "covered roll" is
a specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
Reverse repurchase agreements involve sales by a Fund of portfolio securities to
a financial institution concurrently with an agreement by that Fund to
repurchase the same securities at a later date at a fixed price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the risk
that the market value of the securities purchased by the Fund with the proceeds
of the initial sale may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a reverse repurchase agreement, forward roll or dollar roll
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligations to repurchase the
securities. The Staff of the SEC has taken the position that reverse repurchase
agreements, forward rolls and dollar rolls are to be treated as borrowings for
purposes of the percentage limitations discussed in the section entitled
"Borrowings" below. The Company expects that under normal conditions most of the
borrowings of the Funds will consist of such investment techniques rather than
bank borrowings. See "Other Investment Practices, Risk Conditions, and Policies
of the Funds--Borrowings" below.
When-Issued and Delayed-Delivery Securities.
Each Fund may purchase securities on a when-issued or delayed-delivery basis.
When a Fund purchases securities on a when-issued or delayed-delivery basis, the
price of such securities is fixed at the time of the commitment, but delivery
and payment for the securities may take place up to 120 days
The Prudential Institutional Fund Prospectus 17
<PAGE>
after the date of the commitment to purchase. With respect to up to 5% of their
respective net assets, the Income Fund and the Balanced Fund may each purchase
securities to be delivered and paid for up to six months after the date of the
commitment to purchase. The securities so purchased are subject to market
fluctuation, and no interest accrues to the purchaser during this period.
When-issued and delayed-delivery securities involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or
increases in value and there is a failure to deliver the security.
Custodial Receipts. The Income Fund, the Balanced Fund and the Active Balanced
Fund may each acquire custodial receipts or certificates, such as CATS, TIGRs
and FIC Strips, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, authorities or
instrumentalities. The underwriters of these certificates or receipts generally
purchase a U.S. Government security and deposit the security in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities but are not U.S.
Government Securities and therefore are neither insured nor guaranteed by the
U.S. Government.
Mortgage-Backed Securities. Mortgage-backed securities represent interests in
pools of mortgages. Principal and interest payments made on the mortgages in the
pools are passed through to the holder of such securities. Payment of principal
and interest on some mortgage-backed securities (but not the market value of the
securities themselves) may be guaranteed by the full faith and credit of the
U.S. Government, or guaranteed by agencies or instrumentalities of the U.S.
Government. Mortgage-backed securities created by non-governmental issuers (such
as commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance, and letters of credit, which may be
issued by governmental entities, private insurers, or the mortgage poolers.
Mortgage-backed securities include collateralized mortgage obligations (CMOs),
which are obligations fully collateralized by the portfolio of mortgaged or
mortgage-related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMO as they are received, although
certain classes of CMOs have priority over others for receipt of mortgage
pre-payments. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral is referred to below as "Underlying
Assets").
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special-purpose subsidiaries
of the foregoing. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of a CMO, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Underlying Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Underlying Assets may be
allocated among the several classes of a CMO series in a number of different
ways. Generally, the purpose of the allocation of the cash flow of a CMO to the
various classes is to obtain a more predictable cash flow to the individual
tranches than exists with the underlying collateral of the CMO. As a general
rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance compared to
prevailing market yields on mortgage-backed securities.
Unscheduled or early repayment of principal on mortgage pass-through securities
(arising from prepayments of principal due to the sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Fund to a lower rate of return upon reinvestment of
principal. Like other fixed income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of mortgage-related securities with
prepayment features may not increase as much as other fixed-income securities.
Asset-Backed Securities. The Balanced Fund, the Active Balanced Fund and the
Income Fund may purchase asset-backed securities that represent either
fractional interests or participations in pools of leases, retail installment
loans, or revolving credit receivables held by a trust or limited purpose
finance subsidiary. Such asset-backed securities may be secured by the
underlying assets (such as certificates for automobile receivables or may be
unsecured (such as credit card receivable securities). Depending on the
structure of the asset-backed security, monthly or quarterly payments of
principal and interest or interest only are passed-through or paid through to
certificate holders. Asset-backed securities may be guaranteed up to certain
amounts by guarantees, insurance, or letters of credit issued by a financial
institution affiliated or unaffiliated with the originator of the pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage
pass-through securities), which may shorten the securities' weighted average
life and reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of automo-
18 The Prudential Institutional Fund Prospectus
<PAGE>
bile receivables, the security interests in the underlying automobiles are often
not transferred when the pool is created, with the resulting possibility that
the collateral could be resold.
Unlike traditional fixed income securities, interest and principal payments on
asset-backed securities are made more frequently, usually monthly, and principal
may be prepaid at any time. As a result, if a Fund purchases such a security at
a premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Alternatively, if a Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
Certificate holders may also experience delays in payment if the full amounts
due on underlying loans, leases, or receivables are not realized because of
unanticipated legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors. If consistent with its investment
objective and policies, the Balanced Fund, the Active Balanced Fund and the
Income Fund may invest in other asset-backed securities that may be developed in
the future.
Types of Credit Enhancement. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support, which fall into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Funds will not pay any fees for credit support, although the existence of credit
support may increase the price of a security.
Liquidity Puts. Each Fund may purchase instruments together with the right to
resell the instruments at an agreed-upon price or yield, within a specified
period prior to the maturity date of the instruments. This instrument is
commonly known as a "liquidity put" or a "tender option bond." However, the
Growth Stock Fund and Stock Index Fund will only use such instruments in
connection with the cash or cash equivalent portion of their portfolio.
Illiquid Securities. The Growth Stock Fund, Stock Index Fund, International
Stock Fund, Active Balanced Fund, Balanced Fund and the Money Market Fund may
each hold up to 10% of their net assets in illiquid securities and the Income
Fund 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, 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 Fund intends to comply with any applicable state blue sky laws
restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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 time, uninterested in
purchasing Rule 144A securities. The Funds' Advisers will monitor the liquidity
of such restricted securities under the supervision of the Manager and the
Trustees. Repurchase agreements subject to demand are deemed to have a maturity
equal to the applicable notice period.
The staff of the SEC has taken the position that purchased OTC options and the
assets used as "cover" for written OTC options are illiquid securities unless
the Fund and the counterparty have provided for the Fund, at the Fund's
election, to unwind the over-the-counter option. The exercise of such an option
ordinarily would 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 assets 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.
Securities Lending. Each Fund may lend its portfolio securities to brokers or
dealers, banks, or other recognized institutional borrowers of securities,
provided that the borrower at all times maintains collateral in an amount equal
to at least 100% of the market value of the securities loaned. During the time
Fund securities are on loan, the borrower will pay the Fund an amount equivalent
to any dividend or interest paid on such securities and the Fund may invest any
cash collateral it receives and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. In these transactions,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. Each Fund
(except the Money Market Fund) may lend up to 30% of the value of its total
assets. The Money Market Fund may lend up to 10% of the value of its total
assets.
Borrowings. Each Fund may borrow from banks or through forward rolls, dollar
rolls or reverse repurchase agreements an amount equal to no more than 20%
(except for the Balanced Fund, the Income Fund and the Money Market Fund) of the
value of its total assets to take advantage of investment opportunities, for
temporary, extraordinary, or emergency purposes or for the clearance of
transactions and may pledge up to 20% of the value of its total assets to secure
these borrowings. The Balanced Fund and the Income Fund may borrow from banks up
to 20% of the value of their respective total assets for the same purposes and
may pledge up to 20% of the value of their respective total assets to secure
such borrowings. In addition, the Balanced Fund and the Income Fund may engage
in investment techniques such as reverse repurchase agreements, forward rolls
and dollar rolls to the extent that their respective assets dedicated to such
techniques
The Prudential Institutional Fund Prospectus 19
<PAGE>
combined with the respective values of their bank borrowings do not exceed
33 1/3% of their respective total assets. Such investment techniques are deemed
"borrowings" by the SEC because the SEC considers these techniques to involve
the use of leverage. When a Fund enters into one of these transactions, it
places in a segregated account an amount equal to the Fund's obligations in that
transaction. If a Fund's asset coverage for borrowings falls below 300%, the
Fund will take prompt action to reduce its borrowings. See "Segregated Accounts"
above. If a Fund borrows to invest in securities, any investment gains made on
the securities in excess of interest paid on the borrowing will cause the net
asset value of the shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on the money
borrowed) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case. This is the speculative characteristic
known as leverage. The Money Market Fund may borrow an amount equal to no more
than 20% of the value of its total assets only for temporary, extraordinary or
emergency purposes.
Options on Securities and Securities Indices. Each Fund (other than the Money
Market Fund) may purchase and sell put and call options on any securities in
which it may invest or options on any securities index based on securities in
which the Fund may invest. Each Fund is also authorized to enter into closing
purchase and sale transactions in order to realize gains or minimize losses on
options sold or purchased by the Fund.
A Fund would normally purchase call options to attempt to hedge against an
increase in the market value of the type of securities in which the Fund may
invest. The purchase of a call option would entitle a Fund, in return for the
premium paid, to purchase specified securities at a specified price, upon
exercise of the option, during the option period. A Fund would ordinarily
realize a gain if, during the option period, the value of such securities
exceeds the sum of the exercise price, the premium paid and transaction costs;
otherwise, the Fund would realize a loss on the purchase of the call option. A
Fund may also write a put option, which can serve as a limited long hedge
because increases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the option will be exercised and the Fund will be obligated to
buy the security at more than its market value.
A Fund would normally purchase put options to hedge against a decline in the
market value of securities in its portfolio ("protective puts"). The purchase of
a put option would entitle a Fund, in exchange for the premium paid, to sell
specified securities at a specified price, upon exercise of the option, during
the option period. Gains and losses on the purchase of protective puts would
tend to be offset by countervailing changes in the value of underlying Fund
securities. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreases below the exercise price
sufficiently to cover the premium and transaction costs; otherwise, the Fund
would realize a loss on the purchase of the put option. A Fund may 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.
A Fund may purchase and sell put and call options on securities indices for
hedging against a decline in the value of the securities owned by the Fund or
against an increase in the market value of the type of securities in which the
Fund may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. A Fund purchasing or selling securities index options is subject
to the risk that the value of its portfolio securities may not change as much as
or more than the index because a Fund's investments generally will not match the
composition of the index. See "Other Considerations--Taxes" and "Other
Investment Practices, Risk Conditions, and Policies of the Funds" in the
Statement of Additional Information.
Futures Contracts and Options on Futures Contracts. The Balanced Fund, the
Active Balanced Fund and the Income Fund may enter into futures contracts on
securities, securities indices and interest rate indices. The Stock Index Fund
may enter into futures contracts on securities indices. The International Stock
Fund, the Balanced Fund and the Active Balanced Fund may also enter into
currency futures contracts and options thereon. The Growth Stock Fund, the Stock
Index Fund and the Active Balanced Fund may also purchase and sell options on
futures contracts on stock indices, and the Active Balanced Fund may also
purchase and sell options on futures contracts on interest rate indices. Each
Fund (except for the Money Market Fund) may enter into other types of futures
contracts when they become available, provided they correspond to securities
held by the relevant Fund. However, a Fund might not employ any of these
instruments.
To the extent that a Fund enters into futures contracts, options on futures
contracts, or options on foreign currencies traded on a Commodity Futures
Trading Commission (CFTC)-regulated exchange, in each case other than for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by which
options are "in-the-money") will not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any contracts the Fund has entered into. In general, a call option on
a futures contract is "in-the-money" if the value of the underlying futures
contract exceeds the strike, i.e., exercise, price of the call; a put option on
a futures contract is "in-the-money" if the value of the underlying futures
contract is exceeded by the strike price of the put. This limitation does not
limit the percentage of a Fund's assets at risk to 5%. These transactions
involve brokerage costs, require margin deposits and require the Fund to
segregate assets to cover such contracts and options. In addition, a Fund's
activities in futures contracts and options thereon may be limited by the
requirements of the Inter-
20 The Prudential Institutional Fund Prospectus
<PAGE>
nal Revenue Code for qualification as a regulated investment company. See "Other
Considerations--Taxes" and "Other Investment Practices, Risk Conditions, and
Policies of the Funds" in the Statement of Additional Information.
Foreign Currency Forward Contracts, Options and Futures Transactions. The
International Stock Fund, the Balanced Fund and the Active Balanced Fund may
purchase and sell foreign currency forward contracts, futures contracts on
foreign currency, and options on futures contracts on foreign currency to
protect against the effect of adverse changes on foreign currencies. In addition
to the limitations on such practices described below, the Fund's ability to
engage in such practices may be limited by tax considerations. See "Other
Considerations--Taxes" and "Other Investment Practices, Risk Conditions, and
Policies of the Funds" in the Statement of Additional Information.
A forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, at a price set at the time of the
contract. These contracts are traded in the market conducted directly between
currency traders (typically large commercial banks) and their customers. See
"Other Investment Practices, Risk Conditions, and Policies of the Funds--Foreign
Currency Forward Contracts, Options and Futures Transactions" in the Statement
of Additional Information.
When a Fund invests in foreign securities, it may enter into forward contracts
in several circumstances to protect the value of its assets. A Fund may not use
forward contracts, options on foreign currencies, futures contracts on foreign
currencies and options on such contracts in order to generate income, although
the use of such contracts may incidentally generate income. However, a Fund's
dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. When a Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security that it holds, the Fund may desire to "lock in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars for the purchase or sale of the amount of
foreign currency involved in the underlying transaction, a Fund could protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received. Additionally, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract, for a fixed
amount of dollars, to sell the amount of foreign currency approximating the
value of some or all of the securities of the Fund denominated in such foreign
currency. Further a Fund may enter into a forward contract in one foreign
currency to hedge against the decline or increase in value of another foreign
currency.
A Fund's successful use of foreign currency forward contracts, options on
foreign currencies, futures contracts on foreign currencies and options on such
contracts depends upon the Adviser's ability to predict the direction of the
market and political conditions, which requires different skills and techniques
than predicting changes in the securities markets generally.
Risks of Investing in Options and Futures.
Participation in the options or futures markets involves investment risks and
transaction costs to which the Funds would not be subject absent the use of
these strategies. If an Adviser's prediction of movements in the direction of
the securities or currency markets or interest rates is inaccurate, the adverse
consequences to a Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of options and futures
include (i) dependence on the Adviser's ability to predict correctly movements
in the direction of interest rates, securities prices and currency markets; (ii)
imperfect correlation, or even no correlation, between the price of options,
futures and options thereon and movements in the prices of the assets being
hedged; (iii) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (iv) the possible absence of a
liquid secondary market for any particular instrument at any time; (v) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; (vi) the fact that, while hedging strategies can reduce the risk
of loss, they can also reduce the opportunity for gain, or even result in
losses, by offsetting favorable price movements in hedged investments; and (vii)
the possible inability of a Fund to purchase or sell a portfolio security at a
time when it would otherwise be favorable for it to do so, or the possible need
for a Fund to sell a security at a disadvantageous time, due to the need for the
Fund to maintain "cover" or to segregate securities in connection with hedging
transactions.
See "Other Considerations--Taxes" and "Other Investment Practices, Risk
Conditions, and Policies of the Funds" in the Statement of Additional
Information.
Interest Rate Swap Transactions. The Balanced Fund and the Income Fund may enter
into interest rate swaps. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed rate payments. The
Funds expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their portfolios or to protect
against any increase in the price of securities the Funds anticipate purchasing
at a later date. See "Other Investment Practices, Risk Conditions, and Policies
of the Funds--Other Investment Techniques" in the Statement of Additional
Information. The Income Fund will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. The
Balanced Fund may only enter into interest rate swaps on a net basis. The risk
of loss with respect to interest rate swaps entered into on a net basis is
limited to the net amount of interest payments that a Fund is contractually
obligated to make. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
The Prudential Institutional Fund Prospectus 21
<PAGE>
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Custodian. To the
extent that the Income Fund enters into interest rate swaps on other than a net
basis, the amount maintained in the segregated account will be the full amount
of the Fund's obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis.
The use of interest rate swaps may involve investment techniques and risks
different from those associated with ordinary portfolio transactions. If a
Fund's Adviser is incorrect in its forecast of market values, interest rates and
other applicable factors, the investment performance of the Fund would diminish
compared to what it would have been if this investment technique had not been
used.
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MORE FACTS ABOUT THE COMPANY
Organization and Capitalization. The Company was established as a Delaware
business trust on May 11, 1992. The Trustees are responsible for the overall
management and supervision of its affairs. The Manager conducts and supervises
the daily business operations of the Company. The Company is authorized to issue
unlimited shares of beneficial interest, $0.001 par value per share. Each share
issued with respect to a Fund has a pro-rata interest in the assets of that Fund
and has no interest in the assets of any other Fund. Each Fund bears its own
liabilities and its proportionate share of the general liabilities of the
Company and is not responsible for the liabilities of any other Fund. The Board
is empowered by the Company's Declaration of Trust and By-laws to establish
additional series and classes of shares. As of December 31, 1995, each of the
following entities owned more than 25% of the outstanding voting securities of
each of the portfolios indicated: Growth Stock Fund, Stock Index Fund and
International Stock Fund--Prudential Employee Savings Plan; Balanced Fund--PAMCO
VCA OA Account and Prudential Employee Savings Plan; Income Fund and Money
Market Fund--The Prudential Insurance Company of America.
Portfolio Turnover. Although no Fund purchases securities with a view to rapid
turnover, there are no limitations on the length of time that securities must be
held by any Fund and a Fund's annual portfolio turnover rate may vary
significantly from year to year. A portfolio turnover rate in excess of 100% may
exceed that of other investment companies with similar objectives. A higher
portfolio turnover rate may involve correspondingly greater transaction costs,
which would be borne directly by the Funds, as well as additional realized gains
and/or losses to shareholders.
Meetings and Voting Rights. The Company does not intend to hold annual
shareholder meetings. Shareholders have certain rights, as set forth in the
Agreement and Declaration of Trust, including the right to call a meeting of
shareholders for the purpose of voting on the removal of one or more Trustees.
Such removal may be effected upon the action of two-thirds of the outstanding
shares of the Company.
Shareholders are entitled to one vote per share. Shares of a Fund will be voted
only with respect to that Fund except for the election of Trustees and
ratification of independent accountants. Approval by the shareholders of one
Fund is effective as to that Fund. Shares have noncumulative voting rights, do
not have preemptive or subscription rights, and are transferable. Pursuant to
the Investment Company Act of 1940, as amended, shareholders of each Fund are
required to approve the adoption of any investment advisory agreement relating
to such Fund and of any changes in fundamental investment restrictions or
policies of the Fund.
Certificates. In the interest of economy and efficiency, the Company does not
issue stock certificates. Shareholders of uncertificated shares have the same
ownership rights as if certificates had been issued.
Shareholder Communications. Shareholders of the Company will receive annual
financial statements examined by the Company's independent accountants as well
as unaudited semi-annual financial statements. Each report will show the
investments owned by the Company and their respective market values thereof, and
will provide other financial information. Shareholders with inquiries regarding
the Company and individual accounts should contact the Manager at (800)
824-7513.
Custodian. The Company's Custodian is State Street Bank and Trust Company, P.O.
Box 1713, Boston, Massachusetts 02105.
Additional Information. This Prospectus, including the State- ment of Additional
Information which has been incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by the Company
with the SEC under the Securities Act of 1933. Copies of the Registration
Statement may be obtained from the Commission or may be examined at the office
of the Commission in Washington, D.C.
22 The Prudential Institutional Fund Prospectus
<PAGE>
The Prudential Institutional Fund
21 Prudential Plaza
751 Broad Street
Newark, NJ 07102-3777
---------------
Bulk Rate
U.S. Postage
PAID
Permit No. 2145
Newark, N.J.
---------------
ThePRUDENTIAL[LOGO]
PIF 02-01-95
<PAGE>
EXHIBIT 17(e)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1996
THE PRUDENTIAL INSTITUTIONAL FUND
Prudential Plaza
751 Broad Street
Newark, New Jersey 07102-3777
This Statement of Additional Information supplements the information
contained in the current Prospectus (the "Prospectus") of The Prudential
Institutional Fund (the "Company"), dated February 1, 1996, and should be read
in conjunction with the Prospectus. The Prospectus may be obtained by contacting
your Program Administrator or by writing the Company at the address listed
above. This Statement of Additional Information, although not in itself a
prospectus, is incorporated by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the section headings used in this Statement of
Additional Information, where applicable, are identical to those used in the
Prospectus.
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUNDS.................................................................................. B-2
Stock Index Fund........................................................................... B-2
Money Market Fund.......................................................................... B-2
MANAGEMENT OF THE COMPANY.................................................................. B-3
The Manager and Advisers................................................................... B-3
The Administrator.......................................................................... B-5
The Distributor............................................................................ B-5
Counsel and Auditors....................................................................... B-5
THE TRUSTEES and OFFICERS.................................................................. B-5
OTHER CONSIDERATIONS....................................................................... B-9
Net Asset Value............................................................................ B-9
Portfolio Transactions..................................................................... B-10
Taxes...................................................................................... B-11
PERFORMANCE AND YIELD INFORMATION.......................................................... B-14
Calculation of Money Market Fund Yield..................................................... B-14
Calculation of Fund Performance............................................................ B-14
Yield (except Money Market Fund)........................................................... B-14
Average Annual Total Return................................................................ B-14
Aggregate Total Return..................................................................... B-15
OTHER INVESTMENT PRACTICES, RISK CONDITIONS AND POLICIES OF THE FUNDS...................... B-15
U.S. Government Securities................................................................. B-15
Repurchase Agreements and Reverse Repurchase Agreements.................................... B-15
Fixed Income Securities.................................................................... B-16
When-Issued and Delayed Delivery Securities................................................ B-17
Forward Rolls and Dollar Rolls............................................................. B-17
Mortgage-Related Securities................................................................ B-17
Collateralized Mortgage Obligations........................................................ B-18
Asset-Backed Securities.................................................................... B-18
Custodial Receipts......................................................................... B-18
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Securities Lending......................................................................... B-19
Borrowing.................................................................................. B-19
Securities of Foreign Issuers.............................................................. B-19
Liquidity Puts............................................................................. B-19
Special Risks of Strategies Involving Options, Futures Contracts and Forward Contracts..... B-20
Options on Securities and Securities Indices............................................... B-20
Futures Contracts and Options on Futures Contracts......................................... B-21
Foreign Currency Forward Contracts, Options and Futures Transactions....................... B-22
Foreign Currency Strategies--Special Considerations........................................ B-23
Covered Forward Currency Contracts, Future Contracts and Options........................... B-23
Illiquid Securities........................................................................ B-24
Other Investment Techniques................................................................ B-24
INVESTMENT RESTRICTIONS.................................................................... B-25
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT.......................................... B-26
FINANCIAL STATEMENTS....................................................................... B-27
INDEPENDENT AUDITORS' REPORT............................................................... B-70
APPENDIX--DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS............................ A-1
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
THE FUNDS
The Prospectus discusses the investment objectives of the following funds
and the policies to be employed to achieve those objectives.
- Growth Stock Fund
- Stock Index Fund
- International Stock Fund
- Active Balanced Fund
- Balanced Fund
- Income Fund
- Money Market Fund
(collectively the "Funds")
Supplemental information is set out below concerning the types of
securities and other instruments in which the Funds may invest, the investment
policies and strategies that the Funds may utilize and certain risks attendant
to those investments, policies and strategies.
Stock Index Fund
If net cash outflows from the Stock Index Fund are anticipated, the Stock
Index Fund may sell stocks (in proportion to their 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 Stock Index Fund will not
increase its holdings of cash in anticipation of any decline in the value of the
S&P 500 Index or of the stock markets generally. If the Stock Index Fund does
hold un-hedged short-term investments as a result of the patterns of cash flows
to and from the Fund, such holdings may cause its performance to differ from
that of the S&P 500 Index.
THE "FUND" IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STANDARD &
POOR'S 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 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 MANAGER, SHAREHOLDERS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Money Market Fund
The Money Market Fund may also, consistent with the provisions of Rule 2a-7
of the Investment Company Act of 1940, as amended (the "1940 Act"), invest in
securities with a face maturity of more than 397 days, provided that either the
security is a variable or floating rate U.S. Government security, or it is a
floating or variable rate security with certain demand or interest rate reset
features.
The Money Market Fund uses the amortized cost method of valuing its
investments, which facilitates the maintenance of the Fund's per share net asset
value at $1.00. The amortized cost method, which is used to value all of the
Fund's securities, involves initially valuing a security at its cost and
thereafter amortizing to maturity any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
The extent of deviation between the Money Market Fund's net asset value
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost will be examined periodically by the Trustees. If such
deviation exceeds 1/2 of
B-2
<PAGE>
1%, the Trustees will promptly consider what action, if any, will be initiated.
In the event the Trustees determine that a deviation exists that may result in
material dilution or other unfair results to investors or existing shareholders,
they will cause the Money Market Fund to take such corrective action as they
regard to be necessary and appropriate to eliminate or reduce to the extent
reasonably practicable such dilution or unfair results. Such action may include
the sale of Money Market Fund instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding part or
all of dividends or payment of distributions from capital or capital gains;
redemptions of shares in kind; or establishing a net asset value per share by
using available market quotations or equivalents. In addition, in order to
stabilize the net asset value per share at $1.00, the Trustees have the
authority (i) to reduce or increase the number of shares outstanding on a pro
rata basis, and (ii) to offset each shareholder's pro rata portion of the
deviation between the net asset value per share and $1.00 from the shareholder's
accrued dividend account or from future dividends.
MANAGEMENT OF THE COMPANY
The Manager and Advisers
The Manager of the Company is Prudential Institutional Fund Management,
Inc.("PIFM" or the "Manager"), whose principal business address is 30
Scranton Office Park, Moosic, Pennsylvania 18507-1789.
Pursuant to an agreement with the Company and the Manager, subject to the
supervision of the Company's Trustees and in conformity with the stated policies
of the Company, manages both the investment operations of the Company and the
composition of the Company's Funds, including the purchase, retention,
disposition and loan of securities, and other instruments held by the Funds (the
"Management Agreement"). In connection therewith, the Manager is obligated to
keep certain books and records of the Company. The management services of the
Manager for the Company are not exclusive under the terms of the Management
Agreement and the Manager is free to, and does, render management services to
others.
The Manager has agreed, until September 30, 1996, to bear any expenses,
including management fees, which would cause the ratio of expenses payable by
each Fund to average daily net assets to exceed the estimated Total Operating
Expenses (After Reduction) for each Fund specified in the expense table at the
beginning of the Prospectus. The fees are computed daily and payable monthly.
The Management Agreement also provides that, in the event the expenses of the
Company (including the fees of the Manager, but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Company's business) for any fiscal year exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statutes or
regulations of any jurisdiction in which the Company's shares are qualified for
offer and sale, the compensation due to the Manager will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable to
the Manager will be paid by the Manager to the relevant Fund. Currently, the
Company believes that the most restrictive expense limitation of state
securities commissions is 2 1/2% of the Company's average daily net assets up to
$30 million, 2% of the next $ 70 million of such assets and 1 1/2% of such
assets in excess of $100 million. The Company reserves the right to waive any
and all fees or a portion thereof at its discretion. Such waiver is subject to
later reimbursement by the applicable Fund for a period up to and including
December 31, 1996.
In connection with its management of the business affairs of the Company,
the Manager bears the following expenses:
(i) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Funds' Advisers;
(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 ("PIC"), Jennison Associates Capital Corp. ("Jennison") and
Mercator Asset Management, L.P. ("Mercator") (collectively, the "Advisers")
pursuant to the subadvisory agreements between the Manager and the Advisers
(collectively, the "Advisory Agreements").
Under the terms of the Management Agreement, the Company is responsible for
the payment of the following expenses: (i) the fees payable to the Manager, (ii)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Funds' Advisers, (iii) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager and Plan Administrator in connection with its obligation of
maintaining required records of the Company, pricing the Funds' shares and the
cashiering function, (iv) the charges and expenses of legal counsel and
independent accountants for the Company, (v) brokerage commissions and any issue
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 Securities
and Exchange Commission ("SEC"), registering the Company and qualifying its
shares under state securities laws, including the preparation and printing of
the Company's registration statements and prospectuses for such purposes,
B-3
<PAGE>
(xi) licensing fees, if any, (xii) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (xiii) fees of the Administrator, and (xiv) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Company's business.
The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Company in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically in
the event of its assignment (as defined in the 1940 Act, and that it may be
terminated without penalty by either party upon not more than 60 days' nor less
than 30 days' written notice. The Management Agreement will continue in effect
for a period of more than two years from the date of execution only so long as
such continuance is specifically approved at least annually in conformity with
the 1940 Act. The Management Agreement was 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 1940 Act on November 16,
1995 and by the sole shareholder of the Company on October 12, 1992. The Manager
received, before any reduction due to the subsidy by the Manager of certain
expenses of the Fund, the following management fees from each Fund, expressed
both as a dollar amount and as a percentage of each Fund's average daily net
assets:
<TABLE>
<CAPTION>
Year ended Year ended Period ended
September 30, 1995 September 30, 1994 September 30, 1993
-------------------- ------------------ ------------------
Fund Amount Rate Amount Rate Amount Rate
------------ ----------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Growth Stock $1,049,893 .70% $500,141 .70% $111,337 .70%
Stock Index 286,843 .40 152,392 .40 68,014 .40
International
Stock 1,367,665 1.15 787,473 1.15 150,665 1.15
Active
Balanced 733,748 .70 412,941 .70 66,355 .70
Balanced 496,395 .70 308,338 .70 110,128 .70
Income 231,931 .50 189,009 .50 75,122 .50
Money Market 236,009 .45 171,766 .45 84,206 .45
</TABLE>
During the same period the Manager subsidized certain expenses of the Fund. See
"Expense Information" and "Management of the Company--The Manager" in the
Prospectus.
The Manager has entered into Advisory Agreements with the "Advisers". The
Advisory Agreements provide that the Advisers furnish investment advisory
services in connection with the management of their respective Funds. For their
services as Advisers, Jennison and Mercator are each paid a portion of the fee
the Manager receives from each Fund. PIC is reimbursed by the Manager for the
reasonable costs and expenses incurred in furnishing its services. In connection
therewith, the Advisers are obligated to keep certain books and records of the
respective Funds to which they provide advisory services. The Manager continues
to have responsibility for all investment advisory services to all the Funds
pursuant to the Management Agreement and supervises the Advisers' performance of
such services.
Jennison advises the Growth Stock Fund and Active Balanced Fund. Founded in
1969 and acquired by The Prudential in 1985, Jennison is known for its highly
skilled investment team that has worked together for many years. Dedicated to
achieving superior investment results for institutional investors, Jennison
currently has $29 billion in assets under management, including more than $15
billion in investments managed with a "growth stock" orientation and $1.6
billion in actively managed balanced assets.
Mercator advises the International Stock Fund. Dedicated to global and
international common stock investing, Mercator was initially founded in 1984 by
senior professionals formerly associated with Templeton Investment Counsel as
Mercator Asset Management, Inc. ("Mercator, Inc."). On November 30, 1995
Mercator, a limited partnership organized under the laws of the State of
Delaware, assumed the investment advisory business of Mercator, Inc. Mercator
currently manages $1.8 billion for institutional clients.
PIC advises the Stock Index, Balanced, Income and Money Market Funds
through various of its specialized investment units discussed below.
Prudential Diversified Investment Strategies (PDI) manages the Stock Index
Fund and Balanced Fund. PDI is dedicated to equity index and balanced fund
investing for institutional clients. Founded in 1975, PDI is among the oldest
quantitatively-oriented balanced managers in the country. PDI currently manages
close to $21 billion in balanced and indexed assets.
Prudential Global Advisors (PGA) manages the Income Fund. PGA focuses on
fixed income investing. PGA is a recognized leader in asset/liability management
and other structured bond portfolios. PGA currently manages over $17 billion in
domestic fixed income assets.
B-4
<PAGE>
PGA also manages the Money Market Fund. PGA focuses on managing
institutional money market accounts and, as of December 31, 1995, manages
approximately $4 billion in short-term money market assets.
The Advisory Agreements, except the Advisory Agreement with Mercator, were
last approved by the Trustees, including a majority of the Trustees who are not
interested persons of the Company and who have no direct or indirect financial
interest in the Advisory Agreements, on November 16, 1995, and by the sole
shareholder of the Company on October 12, 1992. The Advisory Agreement with
Mercator was approved by the Trustees on October 2, 1995 and by the shareholders
of the International Stock Fund on November 16, 1995.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement. Each Advisory Agreement may be terminated by the Company,
the Manager or the relevant Adviser upon not more than 60 days', nor less than
30 days', written notice. Each Advisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the 1940 Act.
The Administrator
The Company has entered into an Agreement with Prudential Mutual Fund
Management, Inc. ("PMF"), an affiliate of the Manager, which provides that PMF
will administer the Company's business affairs and, in connection therewith,
furnish the Company with office facilities, together with those ordinary
clerical and bookkeeping services which are not being furnished by State Street
Bank and Trust Company, the Company's Custodian (The "Administration
Agreement"). PMF will also act as the Company's Transfer and Dividend
Disbursing Agent for no additional fee through its wholly-owned subsidiary,
Prudential Mutual Fund Services, Inc. ("PMFS"), P.O. Box 15005, New Brunswick,
New Jersey 08906. Under the Administration Agreement, the Company will pay PMF a
monthly fee at an annual rate of .17% of the Company's average daily net assets
up to $250 million and .15% of the Company's average daily net assets in excess
of $250 million. PMF will reimburse PMFS for certain of the out-of-pocket
expenses PMFS may incur in providing the transfer agency and dividend disbursing
services and the Company will reimburse PMF for these out-of-pocket expenses.
For the years ended September 30, 1995 and 1994, and period from November 5,
1992 (commencement of operations) to September 30, 1993 the Administrator
received $972,783, $489,154 and $178,445, respectively, under the Administration
Agreement.
The Distributor
Prudential Retirement Services, Inc. ("PRSI") serves as the Distributor
of the Company's shares. The Company's distribution agreement with PRSI (the
"Distribution Agreement") has been approved by the Trustees, including a
majority of the Trustees who are not interested persons of the Company and who
have no direct or indirect financial interest in the Distribution Agreement, on
November 16, 1995. Potential investors may be introduced to the Distributor and
persons who introduce investors may be compensated for such introductions.
Counsel and Auditors
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to the Company. Deloitte & Touche, LLP, 2
World Financial Center, New York, NY 10281-1438, independent accountants, serve
as auditors of the Company.
THE TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Company During Past Five Years
- ---------------------- -------------- --------------------------------------------------------
<S> <C> <C>
Mark R. Fetting* (41) President and Chairman of the Board, President and Chief Operating
30 Scranton Office Trustee Officer, Prudential Institutional Fund Management,
Park Inc. (May, 1992 to date); Managing Director, The
Moosic, PA 18507-1789 Prudential Investment Corporation (October, 1991 to
date); Chairman of the Board, President and Chief
Executive Officer, Prudential Retirement Services,
Inc. (January 1993 to date); President of Prudential
Defined Contribution Services (April 1992 to date).
David A. Finley (63) Trustee Director, Executive Vice President, and Chief Financial
17 Bedford Center Road Officer, Broadway & Seymour Inc. (since January 1996);
Bedford Hills, NY Director of Legent Corp.; formerly Consultant (January
10507 1990 to January 1996).
</TABLE>
B-5
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Company During Past Five Years
- ---------------------- -------------- --------------------------------------------------------
<S> <C> <C>
William E. Fruhan, Trustee Professor, Harvard Graduate School of Business
Jr.(52) Administration (1979 to date).
Harvard Business
School
Boston, MA 02163
August G. Olsen (66) Trustee Pensions and Investments Consultant, August G. Olsen
417 W. Hawthorne Ct. Consulting (1992 to date); Corporate Pension Fund
Lake Bluff, IL 60044 Officer and Investment Manager, Abbott Laboratories
(1987 to 1992).
Herbert G. Stolzer Trustee Retired. Formerly Executive Committee Member, Board of
(70) Directors,Member and Assistant to the Chairman of the
19 Yorktown Road Board of Directors, Johnson & Johnson (August 1987 to
East Brunswick, NJ January 1991).
08816
Thomas A. Early (41) Vice President Vice President and Secretary of Prudential Institutional
30 Scranton Office Fund Management, Inc. and Prudential Retirement
Park Services, Inc. (since July 1994); Vice President and
Moosic, PA 18507-1789 General Counsel, Prudential Defined Contribution
Services (since April 1994); Formerly Associate
General Counsel and Chief Financial Services Counsel
for Frank Russell & Company (April 1988-April 1994).
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President,
New York, NY 10292 Treasurer and Chief Financial Officer (since June
1987) of Prudential Mutual Fund Management, Inc.
("PMF"), Senior Vice President (since March 1987) of
Prudential Securities Incorporated ("Prudential
Securities"); Executive Vice President, Treasurer,
Comptroller and Director (since March 1991),
Prudential Mutual Fund Distributors, Inc.; Director
(since June 1987), PMFS; Vice President and Director
of The Asia Pacific Fund, Inc. (since May 1989) and
Director of Nicholas Applegate Fund, Inc. (since
February 1992).
Walter E. Watkins, Jr. Vice President Vice President, Prudential Institutional Fund
(43) Management, Inc., (since April 1993) and Prudential
30 Scranton Office Retirement Services, Inc. (since March 1994); Director
Park of Mutual Fund Administration, Prudential Defined
Moosic, PA 18507-1789 Contribution Services (since November 1992). Formerly,
financial reporting consultant (August 1991-September
1992).
Eugene S. Stark (37) Treasurer First Vice President (since January 1990) of PMF; First
One Seaport Plaza Vice President (since January 1992) of Prudential
New York, NY 10292 Securities.
S. Jane Rose (49) Secretary Senior Vice President (since January 1991) and Senior
One Seaport Plaza Counsel (since June 1987) of PMF; Senior Vice
New York, NY 10292 President and Senior Counsel of Prudential Securities
(since July 1992); formerly Vice President and
Associate General Counsel of Prudential Securities.
Marguerite E.H. Assistant Vice President and Associate General Counsel (since June
Morrison (39) Secretary 1991) of PMF; Vice President and Associate General
One Seaport Plaza Counsel of Prudential Securities.
New York, NY 10292
- ---------------
* "Interested" Trustee, as defined in the 1940 Act, by reason of his affiliation with the Manager,
the Distributor or a Subadviser.
</TABLE>
B-6
<PAGE>
As of January 12, 1996, the Trustees and officers of the Fund, as a group
owned beneficially less than 1% of the stock of the Company. As of January 23,
1996, each of the following entities owned more than 5% of the outstanding
voting securities of each of the portfolios indicated:
<TABLE>
<CAPTION>
Portfolio Shares
- ------------------------- -----------------
<S> <C> <C>
Growth Stock Fund PAMCO VCA OA Account 943,399 (6%)
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Employee Savings Plan 4,378,426 (28.1%)
71 Hanover Road
Florham Park, NJ 07932-1502
Rite Aid Employee Investment
Opportunity Plan 1,913,760 (12.2%)
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Stock Index Fund PAMCO VCA OA Account 1,619,698 (19%)
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Employee Savings Plan 2,460,902 (28.8%)
71 Hanover Road
Florham Park, NJ 07932-1502
Eden Brewery Thrift Savings Plan and
Fort Worth Brewery Thrift Savings Plan
Miller Brewing Company 533,960 (6.2%)
3939 West Highland Blvd.
Milwaukee, WI 53201-0482
International Stock Fund Prudential Employee Savings Plan 4,017,916 (41.8%)
71 Hanover Road
Florham Park, NJ 07932-1502
PAMCO VCA OA Account 1,235,510 (12.8%)
30 Scranton Office Park
Moosic, PA 18507-1774
Deferred Compensation Plan for
Employees of The Metropolitan
Transportation Authority, its
Subsidiaries and Affiliates and
Thrift Plan for Employees of The
Metropolitan Transportation Authority,
its Subsidiaries and Affiliates 543,152 (5.6%)
347 Madison Ave.
New York, NY 10017
Rite Aid Employee Investment
Opportunity Plan 572,074 (5.9%)
30 Hunter Lane
Camp Hill, PA 17011
Balanced Fund PAMCO VCA OA Account 1,840,795 (25.1%)
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Employee Saving Plan 1,911,531 (26%)
71 Hanover Road
Florham Park, NJ 07932-1502
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
Portfolio Shares
- ------------------------- -----------------
<S> <C> <C>
Seibels, Bruce & Company 414,964 (5.6%)
Employees' Profit Sharing and
Savings Plan
1501 Lady Street
Columbia, SC 29202
Active Balanced Fund PAMCO VCA OA Account 1,575,825 (14%)
30 Scranton Office Park
Moosic, PA 18507-1774
Dobson Park Industries Inc. and Affiliates
Savings Plan and
Dobson Park Industries Inc. and Affiliates
Cash Balance Pension Plan
Dobson Technologies, Inc. 776,559 (6.9%)
c/o IRD Mechanalysis
6150 Huntley Road
Columbus, OH 43229
Rite Aid Employee Investment
Opportunity Plan 1,027,817 (9.1%)
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Thompson & Knight Savings Plan and
Thompson & Knight Retirement Plan 1,196,886 (10.6%)
300 First City Center
1700 Pacific Ave.
Dallas, TX 75201
Income Fund Prudential Insurance Company 2,932,815 (52.7%)
of America
30 Scranton Office Park
Moosic, PA 18507-1789
Rite Aid Employee Investment
Opportunity Plan 738,345 (13.3%)
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Money Market Fund Prudential Insurance Company 28,188,209
of America (48.4%)
30 Scranton Office Park
Moosic, PA 18507-1789
</TABLE>
The Prudential Insurance Company of America is a mutual life insurance
company incorporated in 1873 under the laws of the state of New Jersey. The
Prudential Employee Savings Plan is a defined contribution retirement plan. The
PAMCO VCA OA Account is a portion of The Prudential Variable Contract Investment
Fund, a separate account, established in 1962, of The Prudential Insurance
Company of America.
The interested trustees serve without compensation. The following table
sets forth the aggregate compensation paid by the Company to the Trustees who
are not affiliated with the Manager for the fiscal year ended September 30, 1995
and the aggregate compensation paid to such Trustees for service on the
Company's board and that of all other funds managed by Prudential Institutional
Fund Management, Inc. (Fund Complex) for the fiscal year ended September 30,
1995.
B-8
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
- --------------------------------------------------------------------------------------------------------
Pension or Total
Retirement Compensation
Benefits Accrued Estimated from Company
Aggregate As Part of Annual and Fund
Compensation Company Benefits Upon Complex Paid
Name and Position From Company Expenses Retirement to Trustees
- ------------------------------ ------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
David A. Finley--Trustee 15,$000 NONE N/A 15$,000(1/7)**
William E. Fruhan,
Jr.--Trustee 15,000 NONE N/A 15,000(1/7)**
August G. Olsen*--Trustee 15,000 NONE N/A 15,000(1/7)**
Herbert G. Stolzer*--Trustee 15,000 NONE N/A 15,000(1/7)**
* All of the compensation from the Company for the fiscal year ended September 30, 1995 represents
deferred compensation. Aggregate compensation from the Company and the Fund Complex for the fiscal
year ended September 30, 1995, including accrued income and appreciation, amounted to approximately
$18,339 for Mr. Olsen and approximately $21,792 for Mr. Stolzer.
**Indicates number of Funds/portfolios in Fund Complex to which aggregate compensation relates.
</TABLE>
OTHER CONSIDERATIONS
Net Asset Value
Portfolio securities of each Fund, except the Money Market Fund, are
generally valued as follows: (1) Securities for which the primary market is on
an exchange are valued at the last sale price on such exchange on the day of
valuation or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day; (2) Securities that are
actively traded in the over-the-counter ("OTC") market, including listed
securities for which the primary market is believed to be over-the-counter, are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker; (3) Securities issued in private placements are
valued at the mean between the bid and asked prices provided by primary market
dealers or, if no primary dealers are able to provide a market value, at fair
value determined by a valuation committee of Trustees (the "Valuation
Committee"); (4) U.S. Government securities for which market quotations are
available are valued at a price provided by an independent broker/dealer or
pricing service; (5) Short-term debt securities, including bonds, notes,
debentures and other debt securities, and money market instruments such as
certificates of deposit, commercial paper, bankers' acceptances and obligations
of domestic and foreign banks, with remaining maturities of more than 60 days
for which reliable market quotations are readily available, are valued at
current market quotations as provided by an independent broker/dealer or pricing
service; (6) Short-term investments with remaining maturities of 60 days or less
are valued at cost with interest accrued or discount amortized to the date of
maturity, unless the Trustees determine that such valuation does not represent
fair value; (7) Options on securities that are listed on an exchange are valued
at the last sales price at the close of trading on such exchange or, if there
was no sale on the applicable options exchange on such day, at the average of
the quoted bid and asked prices as of the close of such exchange; (8) Futures
contracts and options thereon traded on a commodities exchange or board of trade
are valued at the last sale price at the close of trading on such exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the average of quoted bid and asked prices as
of the close of such exchange or board of trade; (9) Quotations of foreign
securities in a foreign currency shall be converted to U.S. dollar equivalents
at the current rate obtained from a recognized bank or dealer; (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 provides a valuation that, in the judgment of the
applicable Adviser, does not represent fair value, are valued by the Valuation
Committee on the basis of cost of the security, transactions in comparable
securities, relationships among various securities and other factors determined
by the Adviser to materially affect the value of the security. The Company may
engage pricing services to obtain any prices.
The Trustees have determined that in the best interests of shareholders the
best method currently available for valuing the Money Market Fund's securities
is amortized cost. The Trustees continuously review this method of valuation to
assure that the Money Market Fund's securities are valued at their fair value,
as determined by the Trustees in good faith. The Trustees are obligated, as a
particular responsibility within the overall duty of care owed to shareholders,
to establish procedures reasonably designed, taking into account current market
conditions and the Money Market Fund's investment objective, to stabilize the
net asset value per share as computed for the purpose of distribution and
redemption at $1.00 per share. The Trustees' procedures include periodically
monitoring, as appropriate and at such intervals as are reasonable in light of
current market conditions, the relationship between the amortized cost value per
share and a net asset value per share based upon available indications of market
value.
B-9
<PAGE>
While the amortized cost method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Money Market Fund would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the Money Market Fund may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Money Market Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Fund would be able to obtain a somewhat higher
yield if he or she purchased shares of the Money Market Fund on that day, than
would result from investment in a fund utilizing solely market values, and
existing investors in the Money Market Fund would receive less investment
income. The converse would apply in a period of rising interest rates.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the current rate obtained from a recognized bank or
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by or under procedures established by the Trustees of
the Company.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange ("NYSE") is open for trading). In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not business days in New York and on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Fund's calculation of net asset
values unless, pursuant to procedures adopted by the Trustees, the Adviser deems
that the particular event would materially affect net asset value, in which case
an adjustment will be made.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Fund and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to such Fund and with a share of the
general liabilities of the Company. Expenses with respect to any two or more
Funds are to be allocated in proportion to the net asset values of the
respective Funds except where allocations of direct expenses can otherwise be
fairly made.
Portfolio Transactions
Decisions to buy and sell assets for a Fund are made by the Fund's Adviser,
subject to the overall review of the Manager and the Trustees. Although
investment decisions for the Funds are made independently from those of the
other accounts managed by an Adviser, investments of the type that the Funds may
make also may be made for those other accounts. When a Fund and one or more
other accounts managed by an Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
a Fund or the size of the position obtained or disposed of by a Fund.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. over-the-counter
markets, but the prices of those securities includes commissions or mark-ups.
The cost of securities purchased from underwriters includes an underwriting
commission or concession and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. U.S. Government
securities generally are purchased from underwriters or dealers, although
certain newly-issued U.S. Government securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on
behalf of a Fund, its Adviser seeks the best overall terms available. The Funds
have no obligation to do business with any broker-dealer or group of
broker-dealers in executing transactions in securities. In placing orders, the
Advisers are subject to the Company's policy to seek the most favorable price
and efficient execution taking into account such factors as price (including the
applicable commission or dealer spread), size, type, and difficulty of the
transaction, and the firm's general execution and operating facilities. In
assessing the best overall terms available for any transaction, the Adviser will
consider the factors that it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Advisers, subject to seeking best price and execution, are
authorized to cause a Fund to pay broker-dealers that furnish brokerage and
research services (as defined by Section 28(e) of the Securities and Exchange
Act
B-10
<PAGE>
of 1934, as amended (the "1934 Act") a higher commission than another
broker-dealer that does not furnish such brokerage and research services might
charge. The Advisers must regard such higher commissions as reasonable in
relation to the brokerage and research services provided, viewed in terms of
each Adviser's responsibilities to the Fund or other accounts, if any, as to
which it exercises investment discretion. The fees under the Management
Agreement and the Advisory Agreements, respectively, are not reduced by reason
of a Fund's Adviser receiving brokerage and research services. The Trustees of
the Company will periodically review the commissions paid by a Fund to determine
if the commissions paid over representative periods of time were reasonable in
relation to the benefits inuring to the Fund. Over-the-counter purchases and
sales by a Fund are transacted directly with principal market makers except in
those cases in which better prices and executions may be obtained elsewhere.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the Trustees have
determined that transactions for a Fund may be executed through Prudential
Securities Incorporated ("Prudential Securities" or "PSI") and other
affiliated broker-dealers if, in the judgment of the Adviser, the use of an
affiliated broker-dealer is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, the affiliated broker-dealer charges the Fund a fair and reasonable
rate. Furthermore, the Trustees of the Company, including a majority of the
Trustees who are not "interested" Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to PSI are consistent with the foregoing standard. In accordance with
Section 11(a) 1934 Act, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation in a written
contract executed by the Fund and Prudential Securities. Section 11(a) provides
that Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with PSI also are subject to such
fiduciary standards as may be imposed by applicable law.
The Funds may use PSI and other affiliated broker-dealers as a futures
commission merchant in connection with entering into futures contracts and
options on futures contracts if, in the judgment of a Fund's Adviser, the
affiliated broker-dealer charges the Fund a fair and reasonable rate. This
standard would allow PSI to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction.
The Company does not market its shares through intermediary brokers or
dealers; therefore, it is not the Company's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be made through
such firms. However, the Advisers may place portfolio orders with qualified
broker-dealers who recommend the Company to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.
Transactions in options and futures by a Fund will be subject to
limitations established by each of the exchanges and boards of trade governing
the maximum position which may be written or held by a single investor or group
of investors acting in concert, regardless of whether the options and futures
are written or held on the same or different exchanges or are written or held in
one or more accounts or though one or more brokers. Thus, the number of options
and futures which a Fund may write or hold may be affected by options and
futures written or held by the Adviser and other investment advisory clients of
the Adviser. An exchange or board of trade may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The Funds will not purchase any security, including U.S. Government
securities, during the existence of any underwriting or selling group relating
thereto of which PSI is a member, except to the extent permitted by SEC rules.
During the years ended September 30, 1995 and 1994 and the period from
November 5, 1992 (commencement of operations) through September 30, 1993, the
Company paid $965, $3,247 and $1,528, respectively in brokerage commissions to
Prudential Securities.
Taxes
The following is a brief summary of some of the more important tax
considerations affecting the Company, the Funds and their shareholders. No
attempt is made to present a detailed explanation of all federal, state, local,
and foreign income tax considerations. Neither this discussion nor the tax
discussion in the Prospectus is intended to substitute for careful individual
tax planning. Accordingly, potential investors are urged to consult their own
tax advisers with specific reference to their own tax situation.
Tax Consequences to the Funds
As a separate entity for federal tax purposes, each Fund intends to
continue to qualify separately for tax treatment as a regulated investment
company ("RIC") under subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). If so qualified, each Fund will not be subject to
federal income tax with respect to its net investment income and net realized
capital gains, if any, that are distributed to its shareholders. In order to
qualify for treatment as a RIC, each Fund will have to meet income
diversification, distribution,
B-11
<PAGE>
and certain other requirements set forth in the Code. If, in any year, a Fund
should fail to qualify under the 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.
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
----------- ---------
<S> <C> <C>
Growth Stock Fund -- $4,000
International Fund $3,066,000 $169,000
Balanced Fund -- $1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
<TABLE>
<S> <C>
Growth Stock Fund $2,825,300
Income Fund $723,300
</TABLE>
Income and Diversification Requirements. The income tests require each Fund
to derive (i) at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities, or foreign currencies, or
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Income Requirement") and (ii) less than 30% of its gross income
in each taxable year from the sale or other disposition of (A) stock or
securities held for less than three months, (B) options, futures, or forward
contracts (other than those on foreign currencies) held for less than three
months, and (C) foreign currencies (or options, futures, or forward contracts on
foreign currencies) held for less than three months but only if such currencies
(or options, futures, or forward contracts) are not directly related to the
Fund's principal business of investing in stock or securities (or options or
futures with respect to stock or securities) ("Short-Short Limitation"). Each
Fund also must diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater in value than 5% of the Fund's total
assets and not more than 10% of the outstanding voting securities, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
RICs).
Distribution Requirement. Each Fund must distribute (or be deemed to have
distributed) 90% or more of its investment company taxable income (generally
consisting of net investment income, net short-term capital gain, and net gains
from certain foreign currency transactions) for each taxable year. Each Fund
also must meet certain other distribution requirements to avoid a 4%
nondeductible excise tax (these requirements are collectively referred to below
as the "RIC distribution requirements").
Zero Coupon Securities and Original Issue Discount. The Funds may invest in
zero coupon securities and other securities issued with original issue discount.
Such securities generate current income subject to the distribution requirements
without providing cash available for distribution. The Funds do not anticipate
that such investments will adversely affect their ability to meet the RIC
distribution requirements.
Foreign Investments. If the International Stock Fund or any other 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 Code, then in lieu of the
foregoing tax and interest, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gains of the qualified
electing fund, even if not distributed to the Fund, and such amounts would be
subject to the RIC distribution requirements. Management of the Company will
consider these potential tax consequences in evaluating whether to invest in a
PFIC.
Net investment income or capital gains earned by the Funds investing in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Funds to a reduced rate of tax or exemption from tax
on this related income and gains. It is impossible to determine the effective
rate of foreign tax in advance since the amount 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 a Fund actually
collects such receivables or pays such liabilities, generally will be treated as
ordinary income or loss.
B-12
<PAGE>
Similarly, gains or losses on the disposition of foreign currencies or debt
securities held by a 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 Code as "Section 988"
gains and losses.
Furthermore, foreign currency gains and losses attributable to certain
forward contracts, futures contracts that are not "regulated futures
contracts," equity options and unlisted non-equity options also will be treated
as Section 988 gains and losses. (In certain circumstances, however, the Company
may elect capital gain or loss treatment for such transactions.) Section 988
gains and losses will increase or decrease the amount of the Company's
investment company taxable income available for distribution. The Company does
not anticipate that any Section 988 gains and losses the Funds may realize will
adversely affect the ability of any Fund to qualify as a RIC under the Code.
Option and Futures Transactions. The use of hedging strategies, such as
writing (selling) and purchasing options and futures contracts and entering into
forward contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses each
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options, futures, and forward contracts derived by a Fund
with respect to its business of investing in stock, securities, or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts thereon, that
are not directly related to the Fund's principal business of investing in stock
or securities (or options and futures with respect thereto) also will be subject
to the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures, and forward contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify as a RIC.
Under Section 1256 of the 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 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.
B-13
<PAGE>
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Non-exempt investors also should be aware that if shares are purchased shortly
before the record date for a dividend or other distribution, the purchaser will
receive some portion of the purchase price back as a taxable distribution.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Company may quote a Fund's yield or total return in
advertisements or in advertisements, sales literature, reports and other
communications to shareholders.
Calculation of Money Market Fund Yield
The Money Market Fund will prepare a current quotation of yield daily. The
yield quoted will be the simple annualized yield for an identified
seven-calendar-day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base return will be the change in the value of the hypothetical
account during the seven-day period, including dividends declared on any shares
purchased with dividends on the shares, but excluding any capital changes. The
yield will vary as interest rates and market conditions change. Yield also
depends on the quality, length of maturity and type of instruments in the Money
Market Fund, and its operating expenses. The Fund may also prepare an effective
annual yield computed by compounding the unannualized seven-day period return as
follows: by adding 1 to the unannualized seven-day period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The
Fund's seven-day current yield and effective yield as of September 30, 1995 was
5.47% and 5.63% respectively.
Calculation of Fund Performance
Yield (except Money Market Fund)
The Income Fund's 30-day yield is calculated according to a formula
prescribed by the Securities and Exchange Commission ("SEC"), expressed as
follows:
YIELD = 2 [ ( a - b +1)6 - 1]
cd
Where: a=dividends and interest earned during the period.
b=expenses accrued for the period.
c=the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d=the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of its portfolio of securities, thereby
reducing the current yield of the Fund. In periods of rising interest rates the
opposite can be expected to occur. The yield for the 30-day period ended
September 30, 1995 for the Income Fund was 6.11%.
Average Annual Total Return
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
assuming reinvestment of all dividends and distributions and the
effect of the maximum annual fee for participation in the Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. A Fund's net investment income changes in response
to fluctuations in interest rates and the expenses of the Fund. The Average
Annual Total Return for the year ended September 30, 1995 and for the period
from commencement of each Fund's operations (November 5, 1992 for the Growth
Stock
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<PAGE>
Fund, Stock Index Fund, International Stock Fund and Balanced Fund and March 1,
1993 for the Income Fund and January 4, 1993 for the Active Balanced Fund and
Money Market Fund) through September 30, 1995 was: Growth Stock, 35.14% and
18.34%, respectively; Stock Index, 29.02% and 14.72%, respectively;
International Stock, 5.95% and 17.48%, respectively; Active Balanced, 17.66% and
10.49%, respectively; Balanced, 15.90% and 10.85%, respectively; Income, 13.11%
and 5.68%; and Money Market, 5.48% and 3.97%, respectively. These amounts are
computed by assuming a hypothetical initial payment of $1,000. It was then
assumed that all of the dividends and distributions paid by the Fund over the
relevant time period were reinvested. It was then assumed that at the end of the
time period, the entire amount was redeemed.
Aggregate Total Return
A Fund's aggregate total return represents the cumulative change in the
value of an investment in the Fund for the specified period and is computed by
the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value 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 the 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.
A Fund's net investment income changes in response to fluctuations in
interest rates and the expenses of the Fund. Consequently, the given performance
quotations should not be considered as representative of the Fund's performance
for any specified period in the future.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities. The aggregate total return for the period from
commencement of each Fund's operations through September 30, 1995 was: Growth
Stock, 63.00%; Stock Index, 48.96% International Stock, 59.57%; Active Balanced,
31.40%; Balanced 34.84%; Income, 15.35%; and Money Market, 11.24%.
OTHER INVESTMENT PRACTICES, RISK CONDITIONS, AND POLICIES OF THE FUNDS
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which the Funds may invest include
debt obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the U.S., Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Student Loan Marketing Association and Resolution Trust Corporation. Direct
obligations of the U.S. Treasury include a variety of securities that differ in
their interest rates, maturities and dates of issuance. Because the U.S.
Government is not obligated by law to provide support to an instrumentality that
it sponsors, a Fund will invest in obligations issued by an instrumentality of
the U.S. Government only if the Fund's Adviser determines that the
instrumentality's credit risk does not render its securities unsuitable for
investment by the Fund. For further information, see "Mortgage-Related
Securities" below.
Repurchase Agreements and Reverse Repurchase Agreements
Each Fund may enter into repurchase and reverse repurchase agreements with
banks and securities dealers which meet the creditworthiness standards
established by the Company's Trustees ("Qualified Institutions"). The Adviser
will monitor the continued creditworthiness of Qualified Institutions, subject
to the oversight of the Company's Trustees. The resale price of the securities
purchased reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The Fund receives collateral equal to the repurchase price
plus accrued interest, which is
B-15
<PAGE>
marked-to-market daily. These agreements permit the Fund to keep all its assets
earning interest while retaining "overnight" flexibility to pursue investments
of a longer-term nature.
The use of repurchase agreements and reverse repurchase agreements involve
certain risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying securities, as
a result of its bankruptcy or otherwise, the Fund will seek to dispose of such
securities, which action could involve costs or delays. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Fund's ability to dispose of the underlying
securities may be restricted. Finally, it is possible that the Fund may not be
able to substantiate its interest in the underlying securities. To minimize this
risk, the securities underlying the agreement will be held by the Custodian at
all times in an amount at least equal to the repurchase price, including accrued
interest. If the counterparty fails to resell or repurchase the securities, the
Fund may suffer a loss to the extent proceeds from the sale of the underlying
collateral are less than the repurchase price. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Fund may decline below the price of the securities the Fund has sold
but is obligated to repurchase.
Fixed Income Securities
In general, the ratings of Moody's Investors Service ("Moody's"),
Standard & Poor's Ratings Services ("S&P Ratings"), Duff and Phelps, Inc.
("Duff & Phelps") and other nationally recognized statistical rating
organizations ("NRSROs") represent the opinions of those organizations as to
the quality of debt obligations that they rate. These ratings are relative and
subjective, are not absolute standards of quality and do not evaluate the market
risk of securities. These ratings will be among the initial criteria used for
the selection of portfolio securities. Among the factors that the rating
agencies consider are the long-term ability of the issuer to pay principal and
interest and general economic trends.
Subsequent to its purchase by a Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt obligation
by the Fund, but the Fund's Adviser will consider the event in its determination
of whether the Fund should continue to hold the obligation. In addition, to the
extent that the ratings change as a result of changes in rating organizations or
their rating systems or owing to a corporate restructuring of Moody's, S&P
Ratings, Duff & Phelps or other NRSRO, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with its investment
objectives and policies. The Appendix to this Statement of Additional
Information contains further information concerning the ratings of Moody's, S&P
Ratings and Duff & Phelps and their significance.
All Funds, except the Money Market Fund and the Stock Index Fund may
invest, to a limited extent, in medium, lower-rated and unrated debt securities.
Debt securities rated in the lowest category of investment grade debt (i.e., Baa
by Moody's or BBB by S&P Ratings) may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds.
Non-investment grade fixed income securities are rated lower than Baa/BBB
(or the equivalent rating or, if not rated, determined by the relevant Adviser
to be of comparable quality to securities so rated) and are commonly referred to
as high risk or high yield securities or "junk" bonds. High yield securities
are generally riskier than higher quality securities and are subject to more
credit risk, including risk of default, and the prices of such securities are
more volatile than higher quality securities. Such securities may also have less
liquidity than higher quality securities. None of the Funds is authorized to
invest in excess of 5% of its net assets in non-investment grade fixed income
securities.
The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are traded
are generally more limited than those in which higher-rated securities are
traded. The existence of limited markets may make it more difficult for the
Funds to obtain accurate market quotations for purposes of valuing its portfolio
and calculating its net asset value. Moreover, the lack of liquid trading market
may restrict the availability of debt securities for a Fund to purchase and may
also have the effect of limiting the ability of a Fund to sell debt securities
at their fair value either to meet redemption requests or to respond to changes
in the economy or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of fixed income securities
moves inversely with movements in interest rates, in the event of rising
interest rates, the value of the securities held by a Fund may decline
proportionately more than a Fund consisting of higher-rated securities.
Investments in zero coupon bonds may be more speculative and subject to greater
fluctuations in value due to changes in interest rates than bonds that pay
interest currently. If a Fund experiences unexpected net redemptions, it may be
forced to sell its higher-rated bonds, resulting in a decline in the overall
credit quality of the securities held by the Fund and increasing the exposure of
the Fund to the risks of lower-rated securities.
B-16
<PAGE>
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.
Forward Rolls and Dollar Rolls
Forward roll and dollar roll transactions involve the risk that the market
value of the securities sold by a Fund may decline below the repurchase price of
those securities. At the time the Fund enters into a forward roll transaction,
it will place in a segregated account with its Custodian cash, U.S. Government
securities and other liquid high grade debt securities having a value equal to
the repurchase price (including accrued interest) and will subsequently mark the
account to market.
Mortgage-Related Securities
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. GNMA, the principal U.S. guarantor
of such securities, is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA, which guarantee is not backed by the full faith and credit of
the U.S. Government. 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.
The Funds expect that private and governmental entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
the Funds, consistent with their respective investment objectives and policies,
will consider making investments in those new types of securities.
The Funds may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that a Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
B-17
<PAGE>
Government stripped mortgage-related interest-only ("IOs") and principal
only ("POs") securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that a Fund will be able to effect a trade of IOs or POs at a time when it
wishes to do so. The Funds will acquire IOs and POs only if, in the opinion of
the Fund's Adviser, a secondary market for the securities exists at the time of
acquisition, or is subsequently expected. A Fund will treat IOs and POs that are
not U.S. Government securities as illiquid and will limit its investments in
these securities, together with other illiquid investments, in order not to hold
more than 15% (10% in the case of the Money Market Fund) of its net assets in
illiquid securities. With respect to IOs and POs that are issued by the U.S.
Government, the Advisers, subject to the supervision of the Trustees, may
determine that such securities are liquid, if they determine the securities can
be disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share.
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in a Fund not fully recovering its initial investment in an IO.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the Fund's
Adviser, the investment restriction limiting a Fund's investment in illiquid
instruments will apply.
Collateralized Mortgage Obligations
The Funds also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on SEC rules and orders, the Funds' investments in certain
qualifying CMOs, including CMOs that have elected to be treated as Real Estate
Mortgage Investment Conduits (REMICs), are not subject to the 1940 Act's
limitation on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, the CMOs and REMICs must be unmanaged,
fixed-asset issuers that (i) invest primarily in mortgage-backed securities,
(ii) do not issue redeemable securities, (iii) operate under general exemptive
orders exempting them from all provisions of the 1940 Act, and (iv) are not
registered or regulated under the 1940 Act as investment companies. To the
extent that a Fund selects CMOs or REMICs that do not meet the above
requirements, the Fund may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting securities of any single
such entity.
Asset-Backed Securities
The value of these securities may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing credit support
enhancement for the pool.
Custodial Receipts
Each Fund, other than the Growth Stock Fund, the Stock Index Fund, the
International Fund and the Money Market Fund, may acquire custodial receipts or
certificates, such as CATS, TIGRs and FICO Strips, underwritten by securities
dealers or banks, that evidence ownership of future interest payments, principal
payments or both on certain notes or bonds issued by the U.S. Government, its
agencies, authorities or instrumentalities. The underwriters of these
certificates or receipts purchase a U.S. Government security and deposit the
security in an irrevocable trust or custodial account with a custodian bank,
which then issues receipts or certificates that evidence ownership of the
periodic unmatured coupon payments and the final principal payment on the U.S.
Government security. Custodial receipts evidencing specific coupon or principal
payments have the same general attributes as zero coupon U.S. Government
securities.
There are a number of risks associated with investments in custodial
receipts. Although, typically, under the terms of a custodial receipt, a Fund is
authorized to assert its rights directly against the issuer of the underlying
obligation, the Fund may be required to assert through the custodian bank such
rights as may exist against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest when due, a Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
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<PAGE>
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 (except for the Money Market Fund) may borrow from time to time,
at its Adviser's discretion, to take advantage of investment opportunities, when
yields on available investments exceed interest rates and other expenses of
related borrowing, or when, in the Adviser's opinion, unusual market conditions
otherwise make it advantageous for the Fund to increase its investment capacity.
A Fund will only borrow when there is an expectation that it will benefit the
Fund after taking into account considerations such as interest income and
possible losses upon liquidation. Borrowing by a Fund creates an opportunity for
increased net income but, at the same time, creates risks, including the fact
that leverage may exaggerate changes in the net asset value of Fund shares and
in the yield on the Fund. A Fund may also borrow for temporary, extraordinary or
emergency purposes and for the clearance of transactions.
Securities of Foreign Issuers
The value of a Fund's foreign investments may be significantly affected by
changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of a
Fund's assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which the Stock Index Fund and
other Funds may invest are not as developed as the economy of the U.S. and may
be subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation, and limitations on the removal of funds
or other assets, could also adversely affect the value of investments.
Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by a Fund may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which a Fund may invest will have
substantially less trading volume than the principal U.S. markets. As a result,
the securities of some companies in these countries may be less liquid and more
volatile than comparable U.S. securities. There is generally less government
regulation and supervision of foreign stock exchanges, brokers and issuers which
may make it difficult to enforce contractual obligations.
Liquidity Puts
Each Fund, other than the Growth Stock Fund and the Stock Index Fund, may
purchase instruments together with the right to resell the instruments at an
agreed-upon price or yield, within a specified period prior to the maturity date
of the instruments. This instrument is commonly known as a "put bond" or a
"tender option bond."
Consistent with each Fund's investment objective, a Fund may purchase a put
so that it will be fully invested in securities while preserving the necessary
liquidity to purchase securities on a when-issued basis, to meet unusually large
redemptions and to purchase at a later date securities other than those subject
to the put. A Fund will generally exercise the puts or tender options on their
expiration date when the exercise price is higher than the current market price
for the related fixed income security. Puts or tender options may be exercised
prior to the expiration date in order to fund obligations to purchase other
securities or to meet redemption requests. These obligations may arise during
periods in which proceeds from sales of Fund shares and from recent sales of
portfolio securities are insufficient to meet such obligations or when the funds
available are otherwise allocated for investment. In addition, puts may be
exercised prior to the expiration date in the event the Adviser for the Fund
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts or tender options prior to
their expiration date and in selecting which puts or
B-19
<PAGE>
tender options to exercise in such circumstances, the Fund's Adviser considers,
among other things, the amount of cash available to the Fund, the expiration
dates of the available puts or tender options, any future commitments for
securities purchases, the yield, quality and maturity dates of the underlying
securities, alternative investment opportunities and the desirability of
retaining the underlying securities in the Fund.
These instruments are not deemed to be "put options" for purposes of any
Fund's investment restriction.
Special Risks of Strategies Involving Options, Futures Contracts and Forward
Contracts
The use of options, futures contracts and forward currency contracts
(collectively, "Instruments") involves special considerations and risks, as
described below. Risks pertaining to particular hedging strategies are described
in the sections that follow.
(1) Successful use of most Instruments depends upon an Adviser's ability to
predict movements in the overall securities and currency markets, and interest
rates, which requires different skills than predicting changes in the prices of
individual securities. While the Advisers are experienced in the use of
Instruments, there can be no assurance that any particular strategy adopted will
succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an Instrument and price movements of the investments being
hedged. For example, if the value of an Instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Instruments are traded.
The effectiveness of hedges using Instruments on indices will depend on the
degree of correlation between price movements in the index and price movements
in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because its Adviser projected a decline in the price of a security in the
Fund's portfolio, and the price of that security increased instead, the gain
from that increase might be wholly or partially offset by a decline in the price
of the hedging instrument. Moreover, if the price of the hedging instrument
declined by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Instruments involving obligations to third parties (i.e.
Instruments other than purchased options). If a Fund were unable to close out
its positions in such Instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. A Fund's ability to close out a position in an Instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("contra party") to enter into a transaction closing out
the position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a Fund.
Options on Securities and Securities Indices
A number of risk factors are associated with options transactions. There is
no assurance that a liquid secondary market on an options exchange will exist
for any particular option, at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written, a
Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and may incur transaction costs upon the purchase or sale of
underlying securities. The ability to terminate over-the-counter ("OTC")
option positions is more limited than the ability to terminate exchange-traded
option positions because a Fund would have to negotiate directly with a contra
party. In addition, with OTC options, there is a risk that the contra party in
such transactions will not fulfill its obligations.
A Fund pays brokerage commissions or spreads in connection with its options
transactions, as well as for purchases and sales of underlying securities. The
writing of options could result in significant increases in a Fund's turnover
rate. A Fund's transactions in options may be limited by the requirements of the
Internal Revenue Code for qualification as a regulated investment company.
The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when a Fund writes a call
option on an index it cannot provide in advance for its potential settlement
obligations 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
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portfolio containing exactly the same securities as underlie the index and, as a
result, bears a risk that the value of the securities held will vary from the
value of the index.
Even if a Fund could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in
writing index options. When an index option is exercised, the amount of cash
that the holder is entitled to receive is determined by the difference between
the exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
know that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as a common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date; and by the time it learns that it has been assigned, the
index may have declined, with a corresponding decline in the value of its
securities portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If a Fund has purchased an index option and exercises it before the closing
index value for that day it 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 Funds' 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, U.S. government securities or other liquid,
high-grade debt 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 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
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beyond the limit. Daily price limits do not limit potential losses because
prices could move to the daily limit for several consecutive days with little or
no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contract positions whose
prices are moving unfavorably to avoid being subject to further calls. These
liquidations could increase price volatility of the instruments and distort the
normal price relationship between the futures or options and the investments
being hedged. Also, because initial margin deposit requirements in the futures
market are less onerous than margin requirements in the securities markets,
there might be increased participation by speculators in the futures markets.
This participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
Foreign Currency Forward Contracts, Options and Futures Transactions
There is no limitation on the value of forward contracts into which a Fund
may enter. However, a Fund's transactions in forward contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of a forward contract with respect
to specific receivables or payables of the Fund generally arising in connection
with the purchase or sale of its securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to security positions denominated or quoted in
that currency. A Fund may not position hedge with respect to a particular
currency for an amount greater than the aggregate market value (determined at
the time of making any sale of a forward contract) of securities, denominated or
quoted in, or currently convertible into, such currency. A forward contract
generally has no deposit requirements, and no commissions are charged for such
trades.
A Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when a Fund contracts for
the purchase or sale of a security denominated in a foreign currency, or (ii)
when a Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds. By entering into a forward
contract for a fixed amount of dollars for the purchase or sale of the amount of
foreign currency involved in the underlying transaction, a Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received. Additionally, when a Fund's Adviser believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract, for a fixed
amount of dollars, to sell the amount of foreign currency approximating the
value of some or all of the securities of the Fund denominated in such foreign
currency. Further, a Fund may enter into a forward contract in one foreign
currency, or basket of currencies, to hedge against the decline or increase in
value in another foreign currency. Use of a different currency or basket of
currencies magnifies the risk that movements in the price of the forward
contract will not correlate or will correlate unfavorably with the foreign
currency being hedged.
Forward currency contracts (i) are traded in an interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. Failure
by a Fund's contra party to make or take delivery of the underlying currency at
the maturity of the forward contract would result in the loss to the Fund of any
expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that a Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, a Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
A Fund may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) and OTC
options for hedging purposes in a manner similar to that in which forward
foreign currency exchange contracts
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and futures contracts on foreign currencies will be employed. Options on foreign
currencies are similar to options on securities, except that a Fund has the
right to take or make delivery of a specified amount of foreign currency, rather
than securities.
Generally, the OTC foreign currency options used by a Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
If a Fund's Adviser anticipates purchasing a foreign security and also
anticipates a rise in the value of such foreign currency (thereby increasing the
cost of such security), the Fund may purchase call options or write put options
on the foreign currency. A 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
A 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 Fund's Adviser believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the contract will not correlate perfectly with movements in the
price of the currency being hedged is magnified when this strategy is used.
The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, a Fund could be disadvantaged by dealing in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.
Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, 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. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies, or other options, forward currency contracts or futures contracts,
or (2) liquid assets with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. Each Fund will comply with SEC
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash, U.S. government securities or other liquid, high-grade
debt securities in a segregated account with its Custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward currency contract, futures contract or
option is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a Fund's assets to cover or segregated accounts
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
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Illiquid Securities
The Growth Stock Fund, International Stock Fund, Stock Index Fund, Active
Balanced Fund, Balanced Fund and the Money Market Fund may each hold up to 10%
of their net assets in illiquid securities. The Income Fund may hold up to 15%
of its net assets in illiquid securities. Illiquid securities include repurchase
agreements which have a maturity of longer than seven days and securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended ("Securities Act"), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A of the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Advisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, Advisers will consider, 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 nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of the investment adviser,
and (ii) it must not be "traded flat" (i.e., without accrued interest) or in
default as to principal or interest. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
Other Investment Techniques
In order to protect the value of the Funds from interest rate fluctuations,
the Balanced Fund and the Income Fund may enter into interest rate swaps. The
Funds intend to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. In addition, the Income Fund may, engage in the purchase or
sale of interest rate caps, floors and collars. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from the
party selling such interest rate floor.
A Fund may enter into interest rate swaps, caps and floors, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. The Income Fund will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these techniques are entered into for good faith hedging
purposes, the Manager and each Adviser believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. When a Fund enters into interest
rate swaps on a net basis, the net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at
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least equal to the accrued excess will be maintained in a segregated account by
the Custodian. To the extent that a Fund enters into an interest rate swap other
than on a net basis, or sells caps or floors, the amount maintained in the
segregated account will be the full amount of the Fund's obligations. When a
Fund enters into interest rate swaps on other than a net basis, the entire
amount of the Fund's obligations, if any, with respect to such interest rate
swaps will be treated as illiquid. To the extent that a Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
Each Fund may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments that are not presently
contemplated for use by such Fund or that are not currently available but that
may be developed, to the extent such opportunities are both consistent with its
investment objective and legally permissible for the Fund. Before entering into
such transactions or making any such investment, the Fund will provide
appropriate disclosure in its prospectus.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Company
as fundamental policies of the Funds, except as otherwise indicated. Under the
1940 Act, a fundamental policy of a Fund may not be changed without the vote of
a majority of the outstanding voting securities of the Fund. As defined in the
1940 Act, a "majority of a Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are present in person or represented by proxy or (ii)
more than 50% of the outstanding shares. For purposes of the following
limitations: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations does not require elimination of
any asset from Fund.
A Fund may not:
1. Purchase any security if, as a result, with respect to 75% of the Fund's
total assets, more than 5% of the value of its total assets (determined at the
time of investment) would then be invested in the securities of any one issuer.
2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by the Fund.
3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities in
the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities
and, in the case of the Money Market Fund, to the securities of domestic banks
(including all banks which are organized under the laws of the United States or
a state (as defined in the 1940 Act) and U.S. branches of foreign banks that are
subject to the same regulations as U.S. banks.
4. Purchase or sell real estate or interests therein (including limited
partnership interests), although a Fund may purchase securities of issuers which
engage in real estate operations and securities which are secured by real estate
or interests therein.
5. Purchase or sell commodities or commodity futures contracts, except that
all Funds (other than the Money Market Fund) may purchase and sell financial
futures contracts and options thereon and that forward contracts are not deemed
to be commodities or commodity futures contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that a Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.
7. Issue senior securities, borrow money or pledge its assets, except that
each Fund may borrow from banks or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% (except for the Balanced Fund, the
Income Fund and the Money Market Fund) of the value of its total assets to take
advantage of investment opportunities, for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and may pledge up to 20% of the
value of its total assets to secure such borrowings. The Balanced Fund and the
Income Fund may borrow from banks up to 20% of the value of their respective
total assets for the same purposes and may pledge up to 20% of the value of
their respective total assets to secure such borrowings. In addition, the
Balanced Fund and the Income Fund may engage in investment techniques such as
reverse repurchase agreements, forward rolls and dollar rolls to the extent that
their respective assets dedicated to such techniques combined with the
respective values of their bank borrowings do not exceed 33 1/3% of their
respective total assets. The Money Market Fund may borrow an amount equal to no
more than 20% of the value of its total assets only for temporary, extraordinary
or emergency purposes. For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed-delivery basis; the purchase and sale
of options, financial futures contracts and options thereon; the entry into
repurchase agreements and collateral and margin arrangements with respect to any
of the foregoing, will not be deemed to be a pledge of assets nor the issuance
of senior securities.
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8. Make loans except by the purchase of fixed income securities in which a
Fund may invest consistently with its investment objective and policies or by
use of reverse repurchase and repurchase agreements, forward rolls, dollar rolls
and securities lending arrangements.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by any Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)
11. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. The Fund has no limit with respect to
investments in restricted securities.
The Funds will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or development programs.
2. Purchase a security if, as a result, more than 15% of its total assets
would be invested in securities which are restricted as to disposition. This
restriction shall not apply to mortgage-backed securities or obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
3. Purchase or retain the securities of any issuer if any officer or
Trustee of the Company or the Company's Manager or any Adviser owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers and/or
Trustees, who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
4. Purchase warrants if, as a result, the Company would then have more than
5% of its assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the NYSE or American Stock Exchange or a major
foreign exchange will be limited to 2% of the Company's total assets (determined
at the time of investment). For purposes of this limitation, warrants acquired
in units or attached to securities are deemed to be without value.
5. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
6. Invest in companies for the purpose of exercising control or management
of any other issuer, except in connection with a merger, consolidation,
acquisition or reorganization.
7. Invest more than 15% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years.
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.
In order to comply with the rules and regulations of certain State
securities commissions, the Funds have agreed (i) that over-the-counter options
transactions shall be entered into only when such options are not available on a
national securities exchange, and (ii) broker-dealers with whom the Fund shall
enter into such transaction shall have a minimum net worth, at the time of the
transaction is entered into, of $20 million. In addition, the Fund will only buy
and sell puts and calls on securities, stock index futures, or financial futures
or options on financial futures, if such options are written by other persons,
and if;
i) the aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Fund's total net assets; and
ii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's total assets.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Company's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Company.
PMF serves as the Transfer Agent and Dividend Disbursing Agent of the
Company through its wholly-owned subsidiary, Prudential Mutual Fund Services,
Inc., Raritan Plaza One, Edison, New Jersey 08837. PMFS provides customary
transfer agency services to the Company, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. PMFS is also reimbursed for its out-of-pocket expenses, including,
but not limited to, postage, stationery, printing, allocable communications
expenses and other costs.
B-26
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--98.7%
Aerospace/Defense--2.4%
78,200 Boeing Co.......................... $ 5,337,150
-----------
Airlines--1.9%
56,900 AMR Corp.(a)....................... 4,103,913
-----------
Beverages--3.0%
49,500 Coca-Cola Co....................... 3,415,500
61,000 PepsiCo Inc........................ 3,111,000
-----------
6,526,500
-----------
Commercial Services--1.4%
90,850 CUC International, Inc.(a)......... 3,168,394
-----------
Computer Software & Services--14.3%
55,400 America Online Inc................. 3,808,750
78,300 AutoDesk, Inc...................... 3,425,625
85,300 Cisco Systems, Inc.(a)............. 5,885,700
Computer Associates International,
72,150 Inc.............................. 3,048,337
36,400 Macromedia Inc..................... 2,079,350
52,900 Microsoft Corp.(a)................. 4,787,450
64,600 SAP AG (ADR) (Germany)............. 3,544,925
62,300 Silicon Graphics Inc.(a)........... 2,141,563
87,400 Symbol Technologies, Inc.(a)....... 2,895,125
-----------
31,616,825
-----------
Cosmetics & Soaps--1.7%
79,300 Gillette Co........................ 3,776,663
-----------
Drugs & Medical Supplies--7.4%
109,000 Astra AB Class A (Sweden).......... 3,904,135
44,900 Lilly (Eli) & Co................... 4,035,388
62,900 Merck & Co., Inc................... 3,522,400
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Smith Kline Beecham PLC (ADR)
94,300 (United Kingdom)................. $ 4,773,937
-----------
16,235,860
-----------
Electronics--11.1%
104,400 Hewlett-Packard Co................. 8,704,350
131,500 Intel Corp......................... 7,906,437
102,000 Motorola, Inc...................... 7,790,250
-----------
24,401,037
-----------
Financial Services--7.3%
43,900 Federal National Mortgage Assn..... 4,543,650
35,900 First Financial Mgmt. Corp......... 3,504,737
27,200 Morgan Stanley Group, Inc.......... 2,614,600
61,500 Mutual Risk Management, Ltd........ 2,429,250
61,800 The PMI Group Inc.................. 2,927,775
-----------
16,020,012
-----------
Health Care Services--0.6%
53,800 Value Health, Inc.(a).............. 1,425,700
-----------
Hospital Management--1.9%
86,100 United Healthcare Corp............. 4,208,138
-----------
Insurance--1.1%
American International Group,
29,450 Inc.............................. 2,503,250
-----------
Leisure--3.8%
94,300 Disney (Walt) Co................... 5,410,462
99,600 Harrahs Entertainment Inc.(a)...... 2,913,300
-----------
8,323,762
-----------
Lodging--0.8%
75,300 Promus Cos., Inc.(a)............... 1,713,075
-----------
Machinery--1.2%
78,300 Harnischfeger Industries, Inc...... 2,613,263
-----------
</TABLE>
See Notes to Financial Statements.
B-27
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--7.1%
Clear Channel Communications,
44,400 Inc.(a).......................... $ 3,363,300
News Corp. Ltd. (ADR)
120,100 (Australia)...................... 2,642,200
48,900 Omnicom Group...................... 3,184,613
Reuters Holdings PLC (ADR)
70,100 (United Kingdom)................. 3,706,537
43,800 Scholastic Corp.(a)................ 2,748,450
-----------
15,645,100
-----------
Miscellaneous Basic Industry--4.2%
36,000 Applied Materials, Inc.(a)......... 3,681,000
62,400 Cerner Corp.(a).................... 2,137,200
27,300 ITT Corp........................... 3,385,200
-----------
9,203,400
-----------
Miscellaneous Consumer Growth--0.9%
29,900 Eastman Kodak Co................... 1,771,575
7,000 Luxottica Group (ADR) (Italy)...... 342,125
-----------
2,113,700
-----------
Office Equipment & Supplies--1.3%
58,000 Compaq Computer Corp.(a)........... 2,805,750
-----------
Railroads--1.1%
37,800 Union Pacific Corp................. 2,504,250
-----------
Restaurants--2.5%
Lone Star Steakhouse & Saloon,
69,400 Inc.(a).......................... 2,845,400
68,000 McDonald's Corp.................... 2,601,000
-----------
5,446,400
-----------
Retail--4.6%
122,300 AutoZone, Inc.(a).................. 3,118,650
85,350 Dollar General Corp................ 2,507,156
55,533 Home Depot, Inc.................... 2,214,379
46,400 Kohls Corp. (a).................... 2,407,000
-----------
10,247,185
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Technology--10.8%
74,600 Adobe Systems, Inc................. $ 3,860,550
37,800 Broderbund Software Inc............ 2,877,525
34,233 Chiron Corp.(a).................... 3,098,086
35,700 Cirrus Logic, Inc.(a).............. 2,043,825
59,500 Intuit Inc......................... 2,796,500
123,900 LSI Logic Corp.(a)................. 7,155,225
101,800 Pyxis Corp.(a)..................... 1,972,375
-----------
23,804,086
-----------
Telecommunications--4.8%
74,700 Nokia Corp. (ADR) (Finland)........ 5,210,325
46,800 Tellabs, Inc.(a)................... 1,971,450
Vodafone Group PLC (ADR)
82,100 (United Kingdom)................. 3,366,100
-----------
10,547,875
-----------
Transportation--1.5%
Wisconsin Central Transportation
48,900 Corp.(a)......................... 3,264,075
-----------
Total common stocks
(cost $163,489,413)................ 217,555,363
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- --------
Repurchase Agreement--2.2%
$ 4,819 Joint Repurchase Agreement Account,
6.39%, 10/2/95 (Note 5)
(cost $4,819,000)................ 4,819,000
-----------
Total Investments--100.9%
(cost $168,308,413; Note 4)........ 222,374,363
Liabilities in excess of other
assets--(0.9%)................... (1,868,969)
-----------
Net Assets--100%................... $220,505,394
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-28
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks and Equivalents--81.7%
Aerospace/Defense--1.7%
5,400 Allied-Signal, Inc................. $ 238,275
6,600 Boeing Co.......................... 450,450
1,200 General Dynamics Corp.............. 65,850
3,830 Lockheed Corp...................... 257,089
1,700 Loral Corp......................... 96,900
2,200 McDonnell Douglas Corp............. 182,050
1,000 Northrop Corp...................... 60,875
2,400 Raytheon Co........................ 204,000
4,200 Rockwell International Corp........ 198,450
-----------
1,753,939
-----------
Airlines--0.3%
1,450 AMR Corp.(a)....................... 104,581
1,000 Delta Airlines, Inc................ 69,250
2,700 Southwest Airlines Co.............. 68,175
1,200 USAir Group Inc.(a)................ 13,800
-----------
255,806
-----------
Aluminum--0.4%
4,400 Alcan Aluminum Ltd................. 142,450
3,400 Aluminum Co. of America............ 179,775
1,250 Reynolds Metals Co................. 72,188
-----------
394,413
-----------
Automobiles & Trucks--2.0%
7,400 Chrysler Corp...................... 392,200
800 Cummins Engine, Inc................ 30,800
2,000 Dana Corp.......................... 57,750
1,200 Echlin Inc......................... 42,900
20,700 Ford Motor Co...................... 644,287
14,400 General Motors Corp................ 675,000
2,400 Genuine Parts Co................... 96,300
800 Johnson Controls, Inc.............. 50,600
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
1,420 Navistar International Corp.(a).... $ 17,040
1,200 Safety Kleen Corp.................. 17,550
-----------
2,024,427
-----------
Banking--5.1%
7,637 Banc One Corp...................... 278,750
2,200 Bank of Boston Corp................ 104,775
3,700 Bank of New York Co., Inc.......... 172,050
7,200 BankAmerica Corp................... 431,100
1,500 Bankers Trust NY Corp.............. 105,375
1,900 Barnett Banks, Inc................. 107,588
2,500 Boatmen's Bancshares............... 92,500
3,400 Chase Manhattan Corp............... 207,825
4,900 Chemical Banking Corp.............. 298,287
7,700 Citicorp........................... 544,775
2,700 CoreStates Financial Corp.......... 98,888
1,700 First Chicago Corp................. 116,662
1,500 First Fidelity Bancorp, Inc........ 101,250
1,500 First Interstate Bank Corp......... 151,125
3,300 First Union Corp................... 168,300
2,700 Fleet Financial Group, Inc......... 101,925
1,100 Golden West Financial Corp......... 55,550
2,700 Great Western Financial Corp....... 64,125
2,300 H.F. Ahmanson & Co................. 58,363
4,400 KeyCorp............................ 150,700
2,825 Mellon Bank Corp................... 126,066
3,600 Morgan (J.P.) & Co., Inc........... 278,550
2,900 National City Corp................. 89,538
5,300 NationsBank Corp................... 356,425
3,000 NBD Bancorp, Inc................... 114,750
6,200 Norwest Corp....................... 203,050
4,400 PNC Financial Corp................. 122,650
1,100 Republic New York Corp............. 64,350
2,400 Shawmut National Corp.............. 80,700
2,200 Suntrust Banks, Inc................ 145,475
1,800 U.S. Bancorp....................... 50,850
900 Wells Fargo & Co................... 167,062
-----------
5,209,379
-----------
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Beverages--3.0%
800 Adolph Coors Co.................... $ 14,500
4,900 Anheuser Busch Cos., Inc........... 305,637
1,200 Brown-Forman Corp.................. 46,650
24,400 Coca-Cola Co....................... 1,683,600
15,200 PepsiCo Inc........................ 775,200
7,200 Seagram Co., Ltd................... 258,300
-----------
3,083,887
-----------
Chemicals--2.1%
2,200 Air Products & Chemicals, Inc...... 114,675
550 Albemarle Corp..................... 10,313
5,200 Dow Chemical Co.................... 387,400
10,700 duPont (E.I.) de Nemours & Co...... 735,625
1,600 Eastman Chemical Co................ 102,400
1,800 Grace (W.R.) & Co.................. 120,150
2,200 Hercules, Inc...................... 127,600
2,300 Monsanto Co........................ 231,725
1,300 Nalco Chemical Co.................. 44,362
1,300 Rohm & Haas Co..................... 78,487
1,000 Sigma-Aldrich...................... 48,500
2,600 Union Carbide Corp................. 103,350
-----------
2,104,587
-----------
Chemical-Specialty--0.4%
2,625 Engelhard Corp..................... 66,609
400 First Mississippi Corp............. 15,950
1,300 Great Lakes Chemical Corp.......... 87,913
2,800 Morton International, Inc.......... 86,800
2,600 Praxair, Inc....................... 69,550
900 Raychem Corp....................... 40,500
-----------
367,322
-----------
Commercial Services--0.2%
3,350 CUC International, Inc.(a)......... 116,831
1,500 Deluxe Corp........................ 49,687
600 Harland (John H.) Co............... 13,275
1,900 Moore Corp. Ltd.................... 38,238
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
800 Ogden Corp......................... $ 18,800
-----------
236,831
-----------
Computer Software & Services--3.0%
900 AutoDesk, Inc...................... 39,375
2,800 Automatic Data Processing, Inc..... 190,750
1,400 Cabletron Systems, Inc.(a)......... 92,225
900 Ceridian Corp.(a).................. 39,937
5,200 Cisco Systems, Inc.(a)............. 358,800
Computer Associates International,
4,600 Inc.............................. 194,350
1,050 Computer Sciences Corp.(a)......... 67,594
1,000 Intergraph Corp.(a)................ 12,125
4,000 Micron Technology Inc.............. 318,000
11,300 Microsoft Corp.(a)................. 1,022,650
6,900 Novell, Inc.(a).................... 125,925
8,350 Oracle Systems Corp.(a)............ 320,431
3,000 Silicon Graphics Inc.(a)........... 103,125
1,800 Sun Microsystems Inc.(a)........... 113,400
1,900 Tandem Computers Inc.(a)........... 23,275
-----------
3,021,962
-----------
Construction--0.1%
1,600 Fluor Corp......................... 89,600
700 Foster Wheeler Corp................ 24,762
600 Kaufman & Broad Home Corp.......... 7,575
500 Pulte Corp......................... 14,188
-----------
136,125
-----------
Consumer Goods--0.5%
600 Centex Corp........................ 17,400
600 Fleetwood Enterprises, Inc......... 11,925
3,100 Lowes Companies, Inc............... 93,000
3,200 Masco Corp......................... 88,000
2,200 Maytag Corp........................ 38,500
1,000 Owens-Corning Fiberglas Corp.(a)... 44,625
Pioneer Hi Bred International,
1,600 Inc.............................. 73,600
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consumer Goods, cont'd.
900 Stanley Works...................... $ 39,038
1,500 Whirlpool Corp..................... 86,625
-----------
492,713
-----------
Containers--0.1%
600 Ball Corp.......................... 17,775
900 Bemis, Inc......................... 24,863
1,700 Crown Cork & Seal, Inc.(a)......... 65,875
-----------
108,513
-----------
Cosmetics & Soaps--1.9%
500 Alberto Culver Co.................. 15,250
1,350 Avon Products, Inc................. 96,863
1,000 Clorox Co.......................... 71,375
2,800 Colgate-Palmolive Co............... 186,550
8,600 Gillette Co........................ 409,575
International Flavors & Fragrances
2,150 Inc.............................. 103,737
13,300 Procter & Gamble Co................ 1,024,100
-----------
1,907,450
-----------
Diversified Gas--0.1%
2,100 Coastal Corp....................... 70,613
400 Eastern Enterprises, Inc........... 12,850
1,400 Enserch Corp....................... 23,100
1,000 NICOR Inc.......................... 27,250
500 Oneok Inc.......................... 11,625
-----------
145,438
-----------
Drugs & Medical Supplies--7.1%
15,300 Abbott Laboratories................ 652,162
1,600 ALZA Corp.(a)...................... 36,800
6,000 American Home Products Corp........ 509,250
5,100 Amgen, Inc.(a)..................... 254,362
1,000 Bard (C.R.), Inc................... 30,500
1,100 Bausch & Lomb, Inc................. 45,513
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
5,300 Baxter International Inc........... $ 217,962
1,300 Becton Dickinson & Co.............. 81,738
2,300 Biomet, Inc.(a).................... 39,675
2,900 Boston Scientific Corp.(a)......... 123,613
9,850 Bristol-Myers Squibb Co............ 717,819
12,500 Johnson & Johnson Co............... 926,562
5,700 Lilly (Eli) & Co................... 512,287
4,500 Medtronic, Inc..................... 241,875
23,900 Merck & Co., Inc................... 1,338,400
12,200 Pfizer Inc......................... 651,175
7,200 Schering-Plough Corp............... 370,800
900 St. Jude Medical, Inc.(a).......... 56,925
1,100 United States Surgical Corp........ 29,425
3,300 Upjohn Co.......................... 147,263
2,600 Warner Lambert Co.................. 247,650
-----------
7,231,756
-----------
Electronics--4.0%
2,000 Advanced Micro Devices, Inc.(a).... 58,250
2,500 Amdahl Corp.(a).................... 24,063
4,184 AMP Inc............................ 161,084
2,400 Apple Computer, Inc................ 89,400
400 Cray Research, Inc.(a)............. 8,850
400 Data General Corp.(a).............. 4,150
2,800 Digital Equipment Corp.(a)......... 127,750
1,100 EG&G, Inc.......................... 21,450
4,300 Emerson Electric Co................ 307,450
800 Harris Corp........................ 43,900
9,900 Hewlett-Packard Co................. 825,412
15,900 Intel Corp......................... 955,987
11,400 Motorola, Inc...................... 870,675
2,300 National Semiconductors Corp.(a)... 63,538
800 Perkin Elmer Corp.................. 28,500
1,300 Tandy Corp......................... 78,975
600 Tektronix, Inc..................... 35,400
3,700 Texas Instruments Inc.............. 295,537
350 Thomas & Betts Corp................ 22,619
900 Zenith Electronics Corp.(a)........ 7,763
-----------
4,030,753
-----------
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services--2.4%
9,400 American Express Co................ $ 417,125
1,000 Beneficial Corp.................... 52,250
2,000 Block (H&R), Inc................... 76,000
3,258 Dean Witter Discover & Co.......... 183,262
3,500 Federal Home Loan Mortgage Corp.... 241,937
5,350 Federal National Mortgage Assn..... 553,725
2,300 First Data Corp.................... 142,600
1,900 Household International Corp....... 117,800
2,850 MBNA Corp.......................... 118,631
3,400 Merrill Lynch & Co., Inc........... 212,500
1,500 Morgan Stanley Group, Inc.......... 144,188
2,100 Salomon, Inc....................... 80,325
1,350 Transamerica Corp.................. 96,188
-----------
2,436,531
-----------
Food & Beverage--2.3%
10,596 Archer-Daniels-Midland Co.......... 162,910
4,800 Campbell Soup Co................... 241,200
4,700 ConAgra, Inc....................... 186,237
2,900 CPC International, Inc............. 191,400
700 Fleming Cos., Inc.................. 16,800
3,050 General Mills, Inc................. 170,038
1,200 Giant Foods, Inc................... 37,650
4,700 Heinz (H.J.) Co.................... 215,025
1,500 Hershey Foods Corp................. 96,563
4,250 Kellogg Co......................... 307,594
2,600 Quaker Oats Co..................... 86,125
2,000 Ralston Purina Co.................. 115,750
9,200 Sara Lee Corp...................... 273,700
3,500 Sysco Corp......................... 95,375
2,300 Wrigley (W.M.) Junior Co........... 116,150
-----------
2,312,517
-----------
Forest Products--1.5%
900 Boise Cascade Corp................. 36,338
1,900 Champion International Corp........ 102,362
160 Crown Vantage Inc.(a).............. 3,560
900 Federal Paper Board, Inc........... 34,538
1,750 Georgia Pacific Corp............... 153,125
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
4,900 International Paper Co............. $ 205,800
1,600 James River Corp................... 51,200
3,100 Kimberly Clark Corp................ 208,087
2,100 Louisiana Pacific Corp............. 50,663
1,000 Mead Corp.......................... 58,625
600 Potlatch Corp...................... 24,525
2,900 Scott Paper Co..................... 140,650
1,900 Stone Container Corp............... 36,100
1,100 Temple Inland Inc.................. 58,575
1,300 Union Camp Corp.................... 74,912
1,300 Westvaco Corp...................... 59,313
3,900 Weyerhaeuser Co.................... 177,937
1,000 Willamette Industries, Inc......... 66,750
-----------
1,543,060
-----------
Gas Pipelines--0.5%
3,018 Cinergy Corp....................... 84,127
1,000 Columbia Gas System, Inc.(a)....... 38,625
1,800 Consolidated Natural Gas Co........ 72,675
4,900 Enron Corp......................... 164,150
2,300 Noram Energy Corp.................. 18,112
2,900 Panhandle Eastern Corp............. 79,025
700 Peoples Energy Corp................ 19,250
2,000 Williams Cos., Inc................. 78,000
-----------
553,964
-----------
Hospital Management--0.9%
1,900 Beverly Enterprises, Inc.(a)....... 26,125
8,552 Columbia Healthcare Corp........... 415,841
700 Community Psychiatric Centers...... 8,225
1,200 Manor Care, Inc.................... 40,800
1,800 Service Corp. International........ 70,425
500 Shared Medical Systems Corp........ 20,750
4,000 Tenet Healthcare Corp.(a).......... 69,500
3,000 U.S. HealthCare Inc................ 106,125
3,300 United Healthcare Corp............. 161,287
-----------
919,078
-----------
Housing Construction
700 Armstrong World Industries......... 38,850
-----------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Insurance--3.1%
2,200 Aetna Life & Casualty Co........... $ 161,425
Alexander & Alexander Services,
800 Inc.............................. 19,400
8,574 Allstate Corp...................... 303,305
4,000 American General Corp.............. 149,500
American International Group,
9,212 Inc.............................. 783,020
1,650 Chubb Corp......................... 158,400
1,450 CIGNA Corp......................... 150,981
1,600 General Re Corp.................... 241,600
950 Jefferson-Pilot Corp............... 61,038
1,800 Lincoln National Corp.............. 84,825
1,400 Marsh & McLennan Cos............... 123,025
1,900 Providian Corp..................... 78,850
1,200 SAFECO Corp........................ 78,750
1,600 St. Paul Companies, Inc............ 93,400
1,450 Torchmark Corp..................... 61,081
6,131 Travelers, Inc..................... 325,709
1,400 UNUM Corp.......................... 73,850
2,300 USF&G Corp......................... 44,563
750 USLIFE Corp........................ 21,938
3,300 Wachovia Corp...................... 142,312
-----------
3,156,972
-----------
Leisure--0.9%
1,100 Bally Entertainment Group(a)....... 11,963
2,000 Brunswick Corp..................... 40,500
10,100 Disney (Walt) Co................... 579,487
400 Handleman Co....................... 3,550
1,900 Harrahs Entertainment Inc.(a)...... 55,575
1,800 Hasbro, Inc........................ 56,025
700 King World Productions, Inc.(a).... 25,637
4,250 Mattel, Inc........................ 124,844
300 Outboard Marine Corp............... 6,450
-----------
904,031
-----------
Lodging--0.1%
900 Hilton Hotels Corp................. 57,488
2,400 Marriott International, Inc........ 89,700
-----------
147,188
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Machinery--0.9%
600 Briggs & Stratton Corp............. $ 24,150
3,800 Caterpillar Inc.................... 216,125
700 Cincinnati Milacron, Inc........... 22,050
2,000 Cooper Industries, Inc............. 70,500
1,700 Deere & Co......................... 138,337
2,200 Dover Corp......................... 84,150
1,600 Eaton Corp......................... 84,800
700 Giddings & Lewis, Inc.............. 12,206
1,000 Harnischfeger Industries, Inc...... 33,375
2,100 Ingersoll Rand Co.................. 78,750
802 PACCAR Inc......................... 37,494
1,450 Parker Hannifin Corp............... 55,100
800 Snap-On Tools Corp................. 30,400
600 Timken Co.......................... 25,575
800 Varity Corp.(a).................... 35,600
-----------
948,612
-----------
Media--2.1%
3,000 Capital Cities/ABC, Inc............ 352,875
1,220 CBS, Inc........................... 97,447
4,550 Comcast Corp....................... 91,000
3,000 Donnelley (R.R.) & Sons, Co........ 117,000
1,800 Dow Jones & Co., Inc............... 66,375
3,300 Dun & Bradstreet Corp.............. 190,987
2,750 Gannett, Inc....................... 150,219
1,500 Interpublic Group Cos., Inc........ 59,625
950 Knight-Ridder, Inc................. 55,694
1,000 McGraw Hill, Inc................... 81,750
600 Meredith Corp...................... 23,850
1,700 New York Times Co.................. 46,538
7,500 Time Warner, Inc................... 298,125
2,100 Times Mirror Co.................... 60,375
1,300 Tribune Co......................... 86,288
6,939 Viacom Inc.(a)..................... 345,215
-----------
2,123,363
-----------
Mineral Resources--0.8%
800 ASARCO Inc......................... 25,200
Barrick Gold Corp. (ADR)
6,900 (Canada)......................... 178,537
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Mineral Resources, cont'd.
1,850 Cyprus Minerals Co................. $ 52,031
2,400 Echo Bay Mines, Ltd................ 26,100
Freeport-McMoRan Copper & Gold
3,800 Inc.............................. 97,375
2,500 Homestake Mining Co................ 42,500
2,300 INCO, Ltd.......................... 78,775
1,698 Newmont Mining Corp................ 72,165
1,300 Phelps-Dodge Corp.................. 81,413
800 Pittston Minerals Group............ 21,700
4,600 Placer Dome, Inc................... 120,750
2,240 Santa Fe Pacific Gold Corp......... 28,280
-----------
824,826
-----------
Miscellaneous Basic Industry--4.4%
1,700 Applied Materials, Inc.(a)......... 173,825
Bassett Furniture Industries,
225 Inc.............................. 5,653
4,100 Browning Ferris Industries, Inc.... 124,537
600 Crane Co........................... 20,700
1,300 Ecolab, Inc........................ 35,913
750 FMC Corp.(a)....................... 57,000
32,800 General Electric Co................ 2,091,000
1,000 General Signal Corp................ 29,250
1,000 Grainger (W.W.) Inc................ 60,375
2,300 Illinois Tool Works, Inc........... 135,412
2,300 ITT Corp........................... 285,200
1,100 Loews Corp......................... 160,050
1,500 Mallinckrodt Group Inc............. 59,438
900 Millipore Corp..................... 33,750
400 Morrison Knudsen Corp.............. 3,100
150 NACCO Industries, Inc.............. 8,906
2,033 Pall Corp.......................... 47,267
3,900 PPG Industries, Inc................ 181,350
1,127 Teledyne, Inc...................... 30,212
1,600 Textron, Inc....................... 109,200
600 Trinova Corp....................... 20,250
1,200 TRW Inc............................ 89,250
1,500 Tyco International Ltd............. 94,500
2,400 United Technologies Corp........... 212,100
7,500 Westinghouse Electric Corp......... 112,500
9,300 WMX Technologies, Inc.............. 265,050
Value
Shares Description (Note 1)
- ------------------------------------------------------------
100 Zurn Industries, Inc............... $ 2,538
-----------
4,448,326
-----------
Miscellaneous Consumer Growth--1.8%
1,300 Allergan, Inc...................... 43,388
1,400 American Greetings Corp............ 42,700
1,600 Black & Decker Corp................ 54,600
4,500 Corning, Inc....................... 128,812
1,900 Dial Corp.......................... 47,025
6,600 Eastman Kodak Co................... 391,050
700 Jostens, Inc....................... 16,450
Minnesota Mining & Manufacturing
8,100 Co............................... 457,650
800 Polaroid Corp...................... 31,800
1,300 Premark International Inc.......... 66,137
3,000 Rubbermaid, Inc.................... 82,875
3,100 Unilever N.V....................... 403,000
2,000 Whitman Corp....................... 41,250
-----------
1,806,737
-----------
Office Equipment & Supplies--1.9%
1,100 Alco Standard Corp................. 93,225
1,000 Avery Dennison Corp................ 42,000
5,100 Compaq Computer Corp.(a)........... 246,712
2,500 Honeywell, Inc..................... 107,188
International Business Machines
11,000 Corp............................. 1,038,125
2,900 Pitney Bowes, Inc.................. 121,800
3,500 Unisys Corp.(a).................... 27,563
2,150 Xerox Corp......................... 288,906
-----------
1,965,519
-----------
Petroleum--6.7%
1,800 Amerada Hess Corp.................. 87,525
9,600 Amoco Corp......................... 615,600
1,100 Ashland Oil, Inc................... 36,713
3,150 Atlantic Richfield Co.............. 338,231
2,400 Burlington Resources Inc........... 93,000
12,600 Chevron Corp....................... 612,675
24,050 Exxon Corp......................... 1,737,612
</TABLE>
See Notes to Financial Statements.
B-34
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum, cont'd.
1,000 Kerr McGee Corp.................... $ 55,500
700 Louisiana Land & Exploration Co.... 24,938
7,700 Mobil Corp......................... 767,112
6,300 Occidental Petroleum Corp.......... 138,600
900 Pennzoil Co........................ 39,488
5,100 Phillips Petroleum Co.............. 165,750
Royal Dutch Petroleum Co. (ADR)
10,400 (Netherlands).................... 1,276,600
Santa Fe Energy Resources,
1,700 Inc.(a).......................... 16,150
1,500 Sun Co., Inc....................... 38,625
3,500 Tenneco, Inc....................... 161,875
5,000 Texaco, Inc........................ 323,125
4,800 Unocal Corp........................ 136,800
5,600 USX Marathon Corp.................. 110,600
1,100 Western Atlas, Inc.(a)............. 52,112
-----------
6,828,631
-----------
Petroleum Services--0.6%
2,600 Baker Hughes Inc................... 52,975
3,400 Dresser Industries, Inc............ 81,175
2,200 Halliburton Co..................... 91,850
500 Helmerich & Payne, Inc............. 14,063
1,000 McDermott International, Inc....... 19,750
1,900 Oryx Energy Co.(a)................. 24,700
1,400 Rowan Cos., Inc.(a)................ 10,500
4,700 Schlumberger, Ltd.................. 306,675
1,600 Sonat Inc.......................... 51,200
-----------
652,888
-----------
Railroads--0.8%
1,765 Burlington Northern Inc............ 127,975
1,500 Consolidated Rail Corp............. 103,125
2,000 CSX Corp........................... 168,250
2,500 Norfolk Southern Corp.............. 186,875
4,000 Union Pacific Corp................. 265,000
-----------
851,225
-----------
Restaurants--0.6%
3,150 Darden Restaurants Inc............. 36,225
Value
Shares Description (Note 1)
- ------------------------------------------------------------
400 Luby's Cafeterias, Inc............. $ 8,600
13,400 McDonald's Corp.................... 512,550
Ryan's Family Steak Houses,
900 Inc.(a).......................... 7,088
700 Shoney's Inc.(a)................... 7,700
2,100 Wendy's International, Inc......... 44,362
-----------
616,525
-----------
Retail--4.3%
4,900 Albertsons, Inc.................... 167,212
2,800 American Stores Co................. 79,450
300 Brown Group, Inc................... 5,513
39 Bruno's, Inc....................... 444
1,700 Charming Shoppes, Inc.............. 7,650
1,900 Circuit City Stores, Inc........... 60,087
1,400 Dayton Hudson Corp................. 106,225
2,200 Dillard Department Stores, Inc..... 70,125
2,800 Gap, Inc........................... 100,800
Great Atlantic & Pacific Tea
700 Inc.............................. 19,600
1,300 Harcourt General, Inc.............. 54,438
9,266 Home Depot, Inc.................... 369,482
8,800 K mart Corp........................ 127,600
2,400 Kroger Co.(a)...................... 81,900
7,000 Limited, Inc....................... 133,000
1,500 Liz Claiborne, Inc................. 37,875
400 Longs Drug Stores Corp............. 16,600
4,800 May Department Stores Co........... 210,000
2,000 Melville Corp...................... 69,000
700 Mercantile Stores, Inc............. 31,500
3,200 Newell Co.......................... 79,200
1,400 NIKE, Inc.......................... 155,575
1,600 Nordstrom, Inc..................... 66,800
4,400 Penney (J.C.), Inc................. 218,350
1,200 Pep Boys - Manny, Moe & Jack....... 32,550
3,752 Price Costco, Inc.(a).............. 64,253
1,600 Reebok International, Ltd.......... 55,000
1,500 Rite-Aid Corp...................... 42,000
7,500 Sears Roebuck & Co................. 276,562
1,600 Sherwin Williams Co................ 56,000
1,100 Stride Rite Corp................... 12,513
1,400 Supervalue, Inc.................... 41,125
1,400 TJX Companies, Inc................. 16,625
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Retail, cont'd.
5,300 Toys 'R' Us Inc.(a)................ $ 143,100
44,400 Wal-Mart Stores, Inc............... 1,104,450
4,800 Walgreen Co........................ 134,400
1,500 Winn-Dixie Stores, Inc............. 89,437
2,600 Woolworth Corp..................... 40,950
-----------
4,377,391
-----------
Rubber--0.2%
1,700 Cooper Tire & Rubber............... 41,225
500 Goodrich (B.F.) Co................. 32,938
2,900 Goodyear Tire & Rubber Co.......... 114,187
-----------
188,350
-----------
Steel--0.2%
1,900 Armco Inc.(a)...................... 12,350
1,800 Bethlehem Steel Corp.(a)........... 25,425
1,000 Inland Steel Industries, Inc....... 22,750
1,700 Nucor Corp......................... 76,075
1,500 USX Corp. - U.S. Steel Group....... 46,500
1,850 Worthington Industries, Inc........ 33,994
-----------
217,094
-----------
Telecommunications--1.3%
3,700 ALLTEL Corp........................ 110,538
750 Andrew Corp.(a).................... 45,844
2,200 DSC Communications Corp.(a)........ 130,350
13,000 MCI Communications Corp............ 338,812
4,900 Northern Telecom Ltd............... 174,562
1,500 Scientific Atlanta, Inc............ 25,313
6,800 Sprint Corp........................ 238,000
12,500 Tele Communications, Inc.(a)....... 218,750
1,700 Tellabs, Inc.(a)................... 71,613
-----------
1,353,782
-----------
Textiles--0.2%
1,500 Fruit of the Loom, Inc.(a)......... 30,938
National Service Industries,
1,000 Inc.............................. 29,250
700 Russell Corp....................... 17,850
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
400 Springs Industries, Inc............ $ 15,700
1,200 VF Corp............................ 61,200
-----------
154,938
-----------
Tobacco--1.6%
3,700 American Brands Inc................ 156,325
16,250 Philip Morris Cos., Inc............ 1,356,875
3,800 UST, Inc........................... 108,775
-----------
1,621,975
-----------
Trucking & Shipping--0.2%
900 Consolidated Freightways, Inc...... 22,275
1,100 Federal Express Corp.(a)........... 91,300
5,600 Laidlaw Inc........................ 49,000
800 Roadway Services, Inc.............. 39,800
1,400 Ryder System, Inc.................. 35,525
400 Yellow Corp........................ 5,500
-----------
243,400
-----------
Utility-Communications--6.6%
9,600 AirTouch Communications(a)......... 294,000
10,700 Ameritech Corp..................... 557,737
30,700 AT&T Corp.......................... 2,018,525
8,500 Bell Atlantic Corp................. 521,687
9,600 BellSouth Corp..................... 702,000
18,700 GTE Corp........................... 733,975
8,300 NYNEX Corp......................... 396,325
8,200 Pacific Telesis Group.............. 252,150
11,800 SBC Communications Inc............. 649,000
9,100 U.S. West, Inc..................... 428,838
4,200 Unicom Corp........................ 127,050
-----------
6,681,287
-----------
Utility-Electric--2.8%
3,600 American Electric Power, Inc....... 130,950
2,700 Baltimore Gas & Electric Co........ 69,863
3,000 Carolina Power & Light Co.......... 100,875
</TABLE>
See Notes to Financial Statements.
B-36
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utility - Electric, cont'd.
3,600 Central & South West Corp.......... $ 91,800
4,500 Consolidated Edison Co............. 136,687
2,800 Detroit Edison Co.................. 90,300
3,400 Dominion Resources, Inc............ 127,925
4,000 Duke Power Co...................... 173,500
4,300 Entergy Corp....................... 112,337
3,600 FPL Group, Inc..................... 147,150
2,200 General Public Utilities Corp...... 68,475
2,500 Houston Industries, Inc............ 110,312
2,800 Niagara Mohawk Power Corp.......... 36,750
1,300 Northern States Power Co........... 58,988
3,000 Ohio Edison Co..................... 68,250
1,700 Pacific Enterprises................ 42,713
8,200 Pacific Gas & Electric Co.......... 244,975
5,400 Pacificorp......................... 102,600
4,300 PECO Energy Co..................... 123,087
4,700 Public Service Enterprise Group.... 139,825
8,700 SCE Corp........................... 154,425
12,800 Southern Co........................ 302,400
4,400 Texas Utilities Co................. 153,450
2,000 Union Electric Co.................. 74,750
-----------
2,862,387
-----------
Total common stocks
(cost $67,756,491)................. 83,284,748
-----------
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--12.9%
U. S. Government--0.7%
United States Treasury Bills
$ 550(b) 5.31%, 12/14/95................... $ 544,003
150(b) 5.41%, 12/14/95................... 148,350
-----------
692,353
-----------
Repurchase Agreement--12.2%
12,494 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)........... 12,494,000
-----------
Total short-term investments
(cost $13,186,353)................ 13,186,353
-----------
Total Investments--94.6%
(cost $80,942,844; Note 4)........ 96,471,101
Other assets in excess of
liabilities--5.4%............... 5,473,465
-----------
Net Assets--100%.................. $101,944,566
-----------
-----------
</TABLE>
--------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-37
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--94.5%
Argentina--2.3%
35,000 Telecom Argentina (ADR) ......... $ 1,465,625
(Utilities)
95,000 YPF Sociedad Anonima (ADR) ...... 1,710,000
(Oil & Gas) -----------
3,175,625
-----------
Australia--7.3%
800,000 CSR, Ltd. ....................... 2,662,008
(Multi-Industry)
540,000 Mayne Nickless Ltd. ............. 2,560,519
(Multi-Industry)
270,000 National Australia Bank Ltd. .... 2,389,001
(Commercial Banking)
900,000 Pioneer International Ltd. ...... 2,382,195
(Building Materials & -----------
Components)
9,993,723
-----------
Canada--4.6%
100,000 Bank of Nova Scotia ............. 2,104,675
(Commercial Banking)
Canadian Tire Corp., Ltd.,
210,000 Class A ......................... 2,366,362
(Automotive Parts)
145,000 MacMillan Bloedel Ltd. .......... 1,782,455
(Forestry & Paper) -----------
6,253,492
-----------
<CAPTION>
Value
Shares Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Finland--2.5%
140,000 Enso-Gutzeit Oy, Class R ........ $ 1,186,316
(Forestry & Paper)
124,000 Outokumpu Oy .................... 2,205,966
(Metals - Non Ferrous) -----------
3,392,282
-----------
France--5.7%
12,000 Chargeurs S.A. .................. 2,484,523
(Multi-Industry)
30,075 Christian Dior S.A. ............. 2,734,923
(Textiles & Apparel)
19,000 Peugeot S.A. .................... 2,595,555
(Automobile Manufacturing) -----------
7,815,001
-----------
Germany--1.7%
7,000 Volkswagen A.G. ................. 2,272,059
(Automobile Manufacturing) -----------
Italy--0.7%
890,000 Bca Fideuram S.P.A. ............. 992,565
(Financial Services) -----------
Japan--5.9%
263,000 Hitachi Ltd. .................... 2,857,545
(Electrical Equipment)
165,000 Matsushita Electric Industrial 2,523,139
Co., Ltd. .
(Electrical Equipment)
51,000 Sony Corp. ...................... 2,637,223
(Electronics) -----------
8,017,907
-----------
</TABLE>
See Notes to Financial Statements.
B-38
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Netherlands--11.3%
20,000 AKZO N.V. ....................... $ 2,400,650
(Chemicals)
30,000 Gamma Holding N.V. .............. 1,349,663
(Textiles & Apparel)
52,000 Internationale - Nederlanden Groep 3,018,495
N.V. .
(Insurance)
77,000 KLM Royal Dutch Airlines ........ 2,699,138
(Airline/Military Technology)
65,000 Knp Bt (kon) Nv ................. 1,929,205
(Forestry & Paper)
84,000 Pakhoed Holdings N.V. ........... 2,461,635
(Energy Equipment & Services)
63,000 Stork N.V. ...................... 1,574,606
(Machinery & Engineering) -----------
15,433,392
-----------
New Zealand--3.6%
700,000 Fisher & Paykel Industries Ltd. 2,165,471
...............................
(Consumer Durable Goods)
1,320,000 Lion Nathan Ltd. ................ 2,762,851
(Beverages & Tobacco) -----------
4,928,322
-----------
Norway--7.5%
195,000 Aker A.S. ....................... 2,827,438
(Multi-Industry)
101,000 Hafslund Nycomed A.S. ........... 2,623,168
(Health & Personal Care)
65,000 Orkla A.S. ...................... 2,899,936
(Food & Household Products)
127,900 Unitor Shipping Service, A.S. ... 1,956,405
(Business & Public Services) -----------
10,306,947
-----------
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
South Korea--7.4%
85,000 Korea Zinc ...................... $ 2,135,512
(Metals - Non Ferrous)
30,575 Lucky Development Co. ........... 704,475
(Construction & Housing)
4,500 Pohang Iron & Steel Co., Ltd. ... 388,375
(Metals - Steel)
13,134 Samsung Electronics Co., Ltd. ... 2,829,572
(Manufacturing)
2,599 Samsung Electronics Co., Ltd., new
shares.......................... 556,542
(Manufacturing)
35,000 Sam Yang Co. .................... 1,298,490
(Misc. Materials & Commodities)
60,020 Tong Yang Cement Corp. .......... 2,117,342
(Construction & Housing) -----------
10,030,308
-----------
Spain--5.9%
87,000 Banco Bilbao Vizcaya ............ 2,678,116
(Commercial Banking)
21,000 Banco de Andalucia .............. 2,726,963
(Commercial Banking)
355,000 Iberdrola ....................... 2,685,974
(Utilities) -----------
8,091,053
-----------
Sweden--7.5%
47,000 Electrolux AB ................... 2,245,708
(Appliances)
95,000 Pharmacia AB .................... 2,854,971
(Commercial Banking)
132,000 SKF International AB ............ 2,910,967
(Consumer Goods)
</TABLE>
See Notes to Financial Statements.
B-39
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Sweden, cont'd.
90,000 Volvo AB ........................ $ 2,205,278
(Automobile Manufacturing) -----------
10,216,924
-----------
Switzerland--11.0%
4,100 Ciba-Geigy Ltd. ................. 3,284,256
(Chemicals)
3,500 Hero ............................ 1,680,363
(Food & Household Products)
11,000 Merkur Holding AG ............... 2,531,142
(Merchandising)
4,000 SMH-Swiss Corp. for
Microelectronics and Watchmaking
Industries Ltd.................. 2,595,156
(Electronics)
4,500 Sulzer Brothers Ltd. ............ 2,608,131
(Machinery & Engineering)
8,500 Zurich Insurance Co. ............ 2,382,353
(Insurance) -----------
15,081,401
-----------
United Kingdom--9.6%
270,076 Allied-Domecq PLC ............... 2,293,666
(Beverages & Tobacco)
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
445,000 Lloyds Abbey Life PLC ........... $ 3,173,557
(Insurance)
210,000 National Westminster Bank PLC ... 2,105,613
(Commercial Banking)
385,000 Takare .......................... 1,363,888
(Commercial Banking)
470,000 Tesco PLC ....................... 2,319,116
(Food & Household Products)
196,000 Whitbread PLC ................... 1,900,144
(Beverages & Tobacco) -----------
13,155,984
-----------
Total common stocks
(cost $111,841,426)............... 129,156,985
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- ----------
Repurchase Agreement--6.0%
$ 8,175 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)
(cost $8,175,000)................. 8,175,000
-----------
Total Investments--100.5%
(cost $120,016,426; Note 4)....... 137,331,985
Liabilities in excess of other
assets--(0.5%).................. (646,763)
-----------
Net Assets--100%.................. $136,685,222
-----------
-----------
</TABLE>
- ---------------
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-40
<PAGE>
THE PRUDENTIAL ACTIVE BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--80.9%
Common Stocks--47.3%
Aerospace/Defense--0.5%
10,500 Boeing Co.......................... $ 716,625
-----------
Airlines--1.4%
12,100 Delta Airlines, Inc................ 837,925
6,300 UAL Corp........................... 1,076,513
-----------
1,914,438
-----------
Automobiles & Trucks--1.8%
51,600 General Motors Corp................ 2,418,750
-----------
Banking--2.8%
38,400 Boatmen's Bancshares............... 1,420,800
9,300 Chemical Banking Corp.............. 566,138
17,800 Fleet Financial Group, Inc......... 671,950
102,300 Hibernia Corp...................... 1,035,787
-----------
3,694,675
-----------
Capital Goods--0.7%
20,900 Duracell International, Inc........ 937,888
-----------
Chemicals--0.8%
41,600 Dexter Corp........................ 1,060,800
-----------
Commercial Services--1.5%
19,850 CUC International, Inc.(a)......... 692,269
30,900 York International Corp............ 1,301,662
-----------
1,993,931
-----------
Computer Software & Services--0.4%
6,800 Novell, Inc.(a).................... 124,100
13,700 Symbol Technologies, Inc.(a)....... 453,812
-----------
577,912
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Diversified Gas--0.3%
10,300 Coastal Corp....................... $ 346,338
-----------
Drugs & Medical Supplies--0.9%
Smith Kline Beecham PLC (ADR)
17,700 (United Kingdom)................. 896,063
19,600 Vertex Pharmaceuticals, Inc........ 367,500
-----------
1,263,563
-----------
Electronics--3.1%
22,000 Hewlett-Packard Co................. 1,834,250
22,700 Intel Corp......................... 1,364,837
24,700 International Rectifier Corp.(a)... 994,175
-----------
4,193,262
-----------
Financial Services--0.5%
13,000 The PMI Group Inc.................. 615,875
-----------
Forest Products--0.9%
13,900 Georgia Pacific Corp............... 1,216,250
-----------
Insurance--2.8%
8,000 Aetna Life & Casualty Co........... 587,000
30,700 CIGNA Corp......................... 3,196,637
-----------
3,783,637
-----------
Leisure--0.6%
37,200 Brunswick Corp..................... 753,300
-----------
Lodging--1.2%
24,500 Hilton Hotels Corp................. 1,564,938
-----------
Machinery--0.6%
23,547 Harnischfeger Industries, Inc...... 785,881
-----------
Media--5.5%
17,700 Dow Jones & Co., Inc............... 652,688
</TABLE>
See Notes to Financial Statements.
B-41
<PAGE>
THE PRUDENTIAL ACTIVE BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media, cont'd.
13,800 Dun & Bradstreet Corp.............. $ 798,675
11,900 McGraw-Hill, Inc................... 972,825
News Corp. Ltd. (ADR)
35,400 (Australia)...................... 778,800
71,800 New York Times Co.................. 1,965,525
10,300 Omnicom Group...................... 670,787
8,100 Scholastic Corp.(a)................ 508,275
14,700 Tribune Co......................... 975,712
-----------
7,323,287
-----------
Mineral Resources--1.5%
47,974 Newmont Mining Corp................ 2,038,895
-----------
Miscellaneous Basic Industry--6.4%
62,900 Avalon Properties, Inc............. 1,281,587
20,200 Champion International Corp........ 1,088,275
11,200 ITT Corp........................... 1,388,800
26,400 Mead Corp.......................... 1,547,700
25,300 Reynolds Metals Co................. 1,461,075
8,500 United Technologies Corp........... 751,188
40,000 Wellman Inc........................ 980,000
-----------
8,498,625
-----------
Miscellaneous Consumer Growth--0.4%
8,600 Eastman Kodak Co................... 509,550
-----------
Office Equipment & Supplies--2.0%
41,200 Apple Computer, Inc................ 1,534,700
9,300 Compaq Computer Corp.(a)........... 449,887
5,000 Xerox Corp......................... 671,875
-----------
2,656,462
-----------
Petroleum--0.5%
15,700 Tenneco, Inc....................... 726,125
-----------
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum Services--1.4%
18,500 Anadarko Petroleum Corp............ $ 876,438
43,400 Dresser Industries, Inc............ 1,036,175
-----------
1,912,613
-----------
Railroads--1.4%
10,901 Southern Pacific Rail Corp.(a)..... 264,349
24,400 Union Pacific Corp................. 1,616,500
-----------
1,880,849
-----------
Retail--1.5%
9,800 Harcourt General, Inc.............. 410,375
84,000 Limited, Inc....................... 1,596,000
-----------
2,006,375
-----------
Steel--0.3%
12,300 USX Corp. - U.S. Steel Group....... 381,300
-----------
Technology--1.8%
19,700 Adobe Systems, Inc................. 1,019,475
8,605 Chiron Corp.(a).................... 778,753
30,600 Pyxis Corp.(a)..................... 592,875
-----------
2,391,103
-----------
Telecommunications--2.8%
78,300 MCI Communications Corp............ 2,040,694
17,300 QUALCOMM Inc.(a)................... 793,637
Vodafone Group PLC (ADR) (United
20,600 Kingdom)......................... 844,600
-----------
3,678,931
-----------
Trucking & Shipping--1.0%
50,700 Ryder System, Inc.................. 1,286,513
-----------
Total common stocks
(cost $52,575,805)................. 63,128,691
-----------
</TABLE>
See Notes to Financial Statements.
B-42
<PAGE>
THE PRUDENTIAL ACTIVE BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--33.6%
U. S. Government Securities
United States Treasury Notes,
$ 3,015 8.875%, 11/15/98................. $ 3,263,255
5,510 7.50%, 11/15/01.................. 5,900,879
17,435 6.25%, 2/15/03................... 17,532,985
14,750 5.75%, 8/15/03................... 14,351,308
United States Treasury Bonds,
3,230 7.875%, 2/15/21.................. 3,703,905
------------
Total debt obligations
(cost $43,190,765)............... 44,752,332
------------
Total long-term investments
(cost $95,766,570)............... 107,881,023
------------
SHORT-TERM INVESTMENTS
Repurchase Agreement--19.2%
25,625 Joint Repurchase Agreement Account,
6.39%, 10/2/95 (Note 5)
(cost $25,625,000)............. 25,625,000
------------
Total Investments--100.1%
(cost $121,391,570; Note 4)...... 133,506,023
Liabilities in excess of other
assets--(0.1%)................. (154,136)
------------
Net Assets--100%................. $133,351,887
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-43
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--89.7%
Common Stocks--45.7%
Aerospace/Defense--0.5%
15,100 Martin Marietta Corp............... $ 296,338
2,100 Rockwell International Corp........ 99,225
-----------
395,563
-----------
Automobiles & Trucks--1.3%
4,700 Allied Signal Automotive, Inc...... 207,387
5,000 Danaher Corp....................... 163,750
General Motors Corp.
4,000 Class E............................ 182,000
10,000 Class H............................ 410,000
3,700 Modine Manufacturing Co............ 105,450
-----------
1,068,587
-----------
Banking--2.8%
7,400 Bank of Boston Corp................ 352,425
16,800 Bank of New York, Inc.............. 781,200
1,900 First Chicago Corp................. 130,387
2,700 First Interstate Bank Corp......... 272,025
23,600 Norwest Corp....................... 772,900
-----------
2,308,937
-----------
Building Materials & Components--0.3%
9,000 USG Corp.(a)....................... 252,000
-----------
Capital Goods--0.6%
Fisher Scientific International,
15,000 Inc.............................. 485,625
-----------
Chemicals--3.9%
7,000 Agrium, Inc........................ 256,845
2,000 Air Products & Chemicals, Inc...... 104,250
10,400 Cytec Industries, Inc.(a).......... 601,900
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
8,000 duPont (E.I.) de Nemours & Co...... $ 550,000
3,000 Eastman Chemical Co................ 192,000
9,000 Grace (W.R.) & Co.................. 600,750
Imperial Chemical Inds. (ADR)
8,000 (United Kingdom)................. 406,000
6,600 Olin Corp.......................... 453,750
-----------
3,165,495
-----------
Chemical-Specialty--1.0%
7,500 Hanna (M.A.) Co.................... 197,812
10,600 Mississippi Chemical Corp.......... 222,600
3,100 OM Group, Inc...................... 94,163
36,100 Uniroyal Chemical Corp.(a)......... 324,900
-----------
839,475
-----------
Commercial Services--0.6%
11,000 York International Corp............ 463,375
-----------
Computer Software & Services--0.5%
6,000 Automatic Data Processing, Inc..... 408,750
-----------
Construction--0.5%
32,000 Giant Cement Holding Inc.(a)....... 388,000
-----------
Consumer Goods--1.6%
13,000 Ethan Allen Interiors, Inc.(a)..... 279,500
13,000 Libbey, Inc........................ 310,375
16,000 Owens Corning Fiberglas Corp.(a)... 714,000
-----------
1,303,875
-----------
Drugs & Medical Supplies--1.8%
10,100 Baxter International Inc........... 415,362
8,000 Schering-Plough Corp............... 412,000
30,000 Whitman Corp....................... 618,750
-----------
1,446,112
-----------
</TABLE>
See Notes to Financial Statements.
B-44
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electrical Equipment--0.9%
14,000 Anixter International Inc.(a)...... $ 579,250
6,800 UCAR International Inc.(a)......... 185,300
-----------
764,550
-----------
Electronics--1.0%
6,000 Emerson Electric Co................ 429,000
7,200 Oak Industries, Inc.(a)............ 216,900
2,500 Sundstrand Corp.................... 161,875
-----------
807,775
-----------
Financial Services--1.6%
12,400 Dean Witter Discover & Co.......... 697,500
10,500 Equitable Companies, Inc........... 388,500
4,700 Finova Group, Inc.................. 209,150
-----------
1,295,150
-----------
Food & Beverage--0.1%
4,000 Sbarro, Inc........................ 92,000
-----------
Forest Products--0.4%
7,000 Pentair, Inc....................... 315,000
-----------
Freight Transportation--0.3%
9,000 Pittston Services Group............ 244,125
-----------
Furniture
1,900 INTERCO Inc.(a).................... 14,963
-----------
Gas Pipelines--1.9%
19,400 Cabot Oil & Gas Corp............... 264,325
12,900 Enron Corp......................... 280,575
15,700 Mesa, Inc.(a)...................... 74,575
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
11,000 Parker & Parsley Petroleum Co...... $ 220,000
6,700 Seagull Energy Corp.(a)............ 135,675
20,000 Total S.A. (ADR) (France).......... 602,500
-----------
1,577,650
-----------
Health Care--0.3%
10,000 Quorum Health Group(a)............. 226,250
-----------
Hospital Management--1.3%
10,400 Columbia Healthcare Corp........... 505,700
33,000 Tenet Healthcare Corp.(a).......... 573,375
-----------
1,079,075
-----------
Insurance--3.7%
7,300 Emphesys Financial Group, Inc...... 271,013
7,000 John Alden Financial Corp.......... 158,375
3,900 NAC Re Corp........................ 141,375
9,700 National Re Corp................... 343,137
16,000 Penncorp Financial Group, Inc...... 382,000
Reinsurance Group of America,
17,200 Inc.............................. 606,300
15,000 TIG Holdings, Inc.................. 403,125
6,000 Travelers, Inc..................... 318,750
28,900 Western National Corp.............. 397,375
-----------
3,021,450
-----------
Machinery--1.5%
Gardner Denver Machinery,
26,000 Inc.(a).......................... 442,000
10,000 IDEX Corp.......................... 357,500
17,100 United Dominion Inds............... 412,537
-----------
1,212,037
-----------
Manufacturing--0.2%
4,500 Parker-Hannifin Corp............... 171,000
-----------
</TABLE>
See Notes to Financial Statements.
B-45
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--2.2%
10,000 Comcast Corp....................... $ 198,750
14,900 Cox Communications, Inc.(a)........ 301,725
9,400 Gannett, Inc....................... 513,475
News Corp. Ltd. (ADR)
6,000 (Australia)...................... 119,250
10,000 Time Warner, Inc................... 397,500
9,437 Times Mirror Co.................... 271,314
-----------
1,802,014
-----------
Medical Technology--0.3%
8,200 Guidant Corp....................... 239,850
-----------
Mineral Resources--0.5%
23,500 INDRESCO, Inc.(a).................. 420,063
-----------
Miscellaneous Basic Industry--4.5%
21,100 ADT Ltd.(a)........................ 290,125
15,600 Belden, Inc........................ 409,500
6,900 Crane Co........................... 238,050
19,500 Ferro Corp......................... 485,062
7,000 FMC Corp.(a)....................... 532,000
9,000 Illinois Tool Works, Inc........... 529,875
17,960 Mark IV Industries, Inc............ 399,610
10,000 Tyco International Ltd............. 630,000
2,500 United Technologies Corp........... 220,938
-----------
3,735,160
-----------
Office Equipment & Supplies--0.6%
12,100 Honeywell, Inc..................... 518,788
-----------
Oil & Gas-Equipment & Services--0.8%
20,700 Frontier Corp...................... 551,138
5,400 Vintage Petroleum, Inc............. 113,400
-----------
664,538
-----------
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum--1.2%
30,000 Cross Timbers Oil Co............... $ 427,500
18,000 Occidental Petroleum Corp.......... 396,000
Santa Fe Energy Resources,
15,000 Inc.(a).......................... 142,500
-----------
966,000
-----------
Petroleum Services--0.5%
33,300 Oryx Energy Co..................... 432,900
-----------
Publishing--0.3%
17,000 American Publishing Co., Class A... 212,500
-----------
Railroads--1.5%
6,400 Burlington Northern Inc............ 464,000
8,900 Illinois Central Corp.............. 348,212
7,000 Union Pacific Corp................. 463,750
-----------
1,275,962
-----------
Restaurants--0.1%
4,300 Shoney's Inc.(a)................... 47,300
-----------
Retail--1.4%
50,000 Best Products, Inc.(a)............. 425,000
12,000 Dillard Department Stores, Inc..... 382,500
4,900 Eckerd Corp.(a).................... 196,000
4,100 Harcourt General, Inc.............. 171,687
-----------
1,175,187
-----------
Rubber--0.4%
9,000 Goodyear Tire & Rubber Co.......... 354,375
-----------
Steel--0.1%
3,000 Carpenter Technology Corp.......... 117,375
-----------
</TABLE>
See Notes to Financial Statements.
B-46
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Technology--0.8%
14,500 Coltec Inds., Inc.(a).............. $ 174,000
10,400 Litton Industries Inc.(a).......... 452,400
-----------
626,400
-----------
Telecommunications--1.5%
20,900 MCI Communications Corp............ 544,706
36,500 Tele Communications, Inc.(a)....... 706,275
-----------
1,250,981
-----------
Utility-Communications--0.4%
9,100 AirTouch Communications(a)......... 278,688
600 WorldCom Inc.(a)................... 19,275
-----------
297,963
-----------
Total common stocks
(cost $31,721,047)................. 37,484,175
-----------
Principal
Amount
(000) DEBT OBLIGATIONS--44.0%
- --------
Asset Backed Securities--0.5%
Standard Credit Card Master Trust
I,
Series 1995 Class - A1
$ 400 8.25%, 1/7/07 (cost $444,938)...... 438,872
-----------
Corporate Bonds--7.2%
African Development Bank,
400 7.70%, 7/15/02..................... 424,732
(Banking)
American General Finance Corp.,
400 7.25%, 5/15/05..................... 412,132
(Financial Services)
Comdisco Inc.,
300 6.50%, 6/15/00..................... 296,730
(Commercial Services)
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consolidated Edison Co., Inc.,
$ 300 6.625%, 2/1/02.................... $ 299,175
(Utilities)
Detroit Edison Co.,
350 6.34%, 3/15/00.................... 346,038
(Utilities)
Federal Express Corp.,
350 10.00%, 9/1/98.................... 381,836
(Shipping)
Ford Motor Credit Co.,
400 9.375%, 12/15/97.................. 424,116
(Financial Services)
General Electric Capital Corp.,
400 8.75%, 11/26/96................... 411,024
(Financial Services)
General Motors Acceptance Corp.,
400 9.625%, 5/15/00................... 447,896
(Financial Services)
Greyhound Financial Corp.,
100 8.50%, 5/1/98..................... 104,629
(Financial Services)
Hanson PLC.,
400 7.375%, 1/15/03................... 413,828
(Industrial) (United Kingdom)
International Lease Finance Corp.,
200 5.50%, 4/1/97..................... 197,634
(Financial Services)
Lehman Brothers, Inc.,
200 7.125%, 7/15/02................... 198,082
(Financial Services)
Norwest Corp.,
300 7.125%, 4/1/00.................... 307,899
(Banking)
Salomon, Inc.,
200 8.64%, 2/27/98.................... 207,340
(Financial Services)
</TABLE>
See Notes to Financial Statements.
B-47
<PAGE>
THE PRUDENTIAL BALANCED FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Corporate Bonds, cont'd.
Sears Roebuck & Co.,
$ 100 9.48%, 7/24/01.................... $ 113,359
(Retail)
Sears Roebuck Acceptance Corp.,
300 6.75%, 9/15/05.................... 297,726
(Financial Services)
Texas Utilities Co.,
300 6.375%, 8/1/97.................... 299,787
(Utilities)
Union Oil Co.,
300 7.75%, 4/20/05.................... 316,758
-----------
(Petroleum)
Total corporate bonds
(cost $5,852,940)................. 5,900,721
-----------
U. S. Government Securities--36.3%
United States Treasury Bonds,
1,600 10.75%, 8/15/05................... 2,120,256
6,300 11.25%, 2/15/15................... 9,473,625
United States Treasury Notes,
3,700 6.00%, 11/30/97................... 3,709,250
400 5.625%, 1/31/98................... 397,688
4,325 9.00%, 5/15/98.................... 4,644,661
5,500 6.375%, 1/15/99................... 5,565,285
2,000 7.50%, 10/31/99................... 2,105,940
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
United States Treasury Notes,
$ 150 7.75%, 11/30/99................... $ 159,421
1,100 6.375%, 8/15/02................... 1,116,324
500 7.25%, 8/15/04.................... 534,610
-----------
Total U. S. Government Securities
(cost $29,249,979).............. 29,827,060
-----------
Total debt obligations
(cost $35,547,857).............. 36,166,653
-----------
Total long-term investments
(cost $67,268,904).............. 73,650,828
-----------
SHORT-TERM INVESTMENT
Repurchase Agreement--8.9%
7,338 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)
(cost $7,338,000)............... 7,338,000
-----------
Total Investments--98.6%
(cost $74,606,904; Note 4)........ 80,988,828
Other assets in excess of
liabilities--1.4%................. 1,121,118
-----------
Net Assets--100%.................. $82,109,946
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-48
<PAGE>
THE PRUDENTIAL INCOME FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LONG-TERM INVESTMENTS--95.9%
Asset Backed Securities--4.0%
Nationsbank Credit Card Trust,
$ 500 Series 1995-1, 6.45%, 4/15/03.... $ 501,875
Prime Credit Card
500 Series 1995-1, 6.75%, 11/15/05... 500,000
Standard Credit Card Trust,
500 Series 1994-4, 8.25%, 11/07/03... 541,090
500 Series 1995-1, 8.25%, 1/07/07.... 548,590
------------
Total asset backed securities
(cost $2,084,823)................ 2,091,555
------------
Corporate Bonds--23.9%
African Development Bank,
500 7.75%, 12/15/01.................. 529,150
(Financial Services)
American General Finance Corp.,
500 7.25%, 5/15/05................... 515,165
(Financial Services)
Associates Corp. of North
America,
(Financial Services)
500 6.625%, 6/15/05.................. 493,845
400 7.25%, 5/15/98................... 409,296
Columbia Healthcare Corp,
500 7.58%, 9/15/25................... 512,500
(Hospital Management)
Comdisco Inc.,
500 6.50%, 6/15/00................... 494,550
(Commercial Services)
Detroit Edison Co.,
500 6.34%, 3/15/00................... 494,340
(Utilities)
Digital Equipment Corp.,
250 7.125%, 10/15/02................. 243,505
(Electronics)
Dresdner Bank AG,
500 7.25%, 9/15/15................... 501,040
(Banking) (Germany)
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Equity Lord Realty Corp.,
$ 300 10.50%, 12/30/97................. $ 316,875
(Real Estate)
Federal Express Corp.,
500 10.00%, 9/01/98.................. 545,480
(Shipping)
General Electric Capital Corp.,
500 7.95%, 2/02/98................... 518,360
(Financial Services)
General Motors Acceptance Corp.,
350 8.00%, 4/10/97................... 358,981
(Financial Services)
Grand Metropolitan Investment
Corp.,
800 Zero Coupon, 1/06/04............. 454,656
(Financial Services) (United Kingdom)
Household Finance Corp.,
1,000 6.375%, 6/30/00.................. 993,560
(Financial Services)
Hydro Quebec,
500 8.00%, 2/01/13................... 525,450
(Utilities) (Canada)
IC Industries Financial Corp.,
705 8.00%, 7/01/96................... 714,166
(Financial Services)
Intermediate American Development
Bank,
435 8.50%, 3/15/11................... 501,046
(Banking)
International Lease Finance
Corp.,
300 5.50%, 4/01/97................... 296,451
(Financial Services)
Lehman Brothers Holdings, Inc.,
400 7.625%, 7/15/99.................. 409,120
(Financial Services)
Petroliam Nasional Berhad,
500 7.75%, 8/15/15................... 511,100
(Petroleum)
</TABLE>
See Notes to Financial Statements.
B-49
<PAGE>
THE PRUDENTIAL INCOME FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Corporate Bonds, cont'd.
Salomon, Inc.,
$ 400 8.64%, 2/27/98................... $ 414,680
(Financial Services)
Sears Roebuck Acceptance Corp.,
500 6.75%, 9/15/05................... 496,210
(Financial Services)
SunAmerica, Inc.,
275 6.58%, 1/15/02................... 270,281
(Insurance)
Tenneco Credit Corp.,
400 10.125%, 12/01/97................ 428,396
(Financial Services)
Time Warner Inc.,
300 9.15%, 2/01/23................... 325,533
(Media)
Union Bank Finland, Ltd.,
250 5.25%, 6/15/96................... 247,670
------------
(Banking) (Finland)
Total corporate bonds
(cost $12,342,321)............... 12,521,406
------------
Foreign Government Obligations--1.9%
New Zealand Government Bond,
500 10.50%, 7/16/00.................. 541,721
Province of Quebec,
400 9.00%, 5/08/01................... 438,952
------------
Total foreign government
obligations
(cost $1,015,099)................ 980,673
------------
U.S. Government and Agency Securities--66.1%
Federal Home Loan Mortgage Corp.,
802 7.00%, 7/01/08................... 804,823
500 7.00%, 8/15/23................... 486,405
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Federal National Mortgage Assn.,
$ 500 6.50%, 2/25/24................... $ 463,905
1,000(a) 6.50%, 15 yr..................... 986,250
1,000(a) 6.50%, 30 yr..................... 964,370
2,268 7.00%, 9/25/23 - 7/01/24......... 2,236,387
2,000(a) 7.50%, 30 yr..................... 2,012,500
1,444 8.00%, 9/01/09 - 7/01/24......... 1,478,962
1,493 9.50%, 1/01/25 - 3/01/25......... 1,577,843
Government National Mortgage
Assn.,
843 7.00%, 2/15/09................... 849,303
2,441(b) 7.00%, 30 yr..................... 2,413,594
697 7.50%, 12/15/22 - 7/15/23........ 707,019
1,261 9.00%, 9/15/19 - 7/15/21......... 1,336,782
Tennessee Valley Authority,
600 7.25%, 7/15/43................... 590,646
United States Treasury Bonds,
200 7.625%, 2/15/25.................. 226,468
450 9.00%, 11/15/18.................. 573,327
200 9.25%, 2/15/16................... 257,406
1,000 10.75%, 8/15/05.................. 1,325,160
1,350 12.00%, 8/15/13.................. 1,986,403
United States Treasury Notes,
3,350 5.25%, 7/31/98................... 3,292,414
650 5.625%, 1/31/98.................. 646,243
1,500 5.75%, 10/31/97.................. 1,496,955
500 5.875%, 3/31/99.................. 498,670
600 6.25%, 2/15/03................... 603,372
150 6.375%, 8/15/02.................. 152,226
2,400 6.375%, 1/15/99.................. 2,428,488
2,100 8.625%, 8/15/97.................. 2,202,375
United States Treasury Strips,
1,500 Zero Coupon, 2/15/08............. 676,680
2,000 Zero Coupon, 8/15/08............. 870,400
700 Zero Coupon, 8/15/11............. 244,657
500 Zero Coupon, 11/15/11............ 171,485
------------
Total U.S. government and
agency securities
(cost $33,818,383)............... 34,561,518
------------
</TABLE>
See Notes to Financial Statements.
B-50
<PAGE>
THE PRUDENTIAL INCOME FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Total long-term investments
(cost $49,260,626)............... $ 50,155,152
------------
SHORT-TERM INVESTMENT
Repurchase Agreement--14.3%
Joint Repurchase Agreement
$ 7,478 Account,
6.39%, 10/2/95 (Note 5)
(cost $7,478,000)................ 7,478,000
------------
Total Investments--110.2%
(cost $56,738,626; Note 4)....... 57,633,152
Liabilities in excess of other
assets--(10.2%).................. (5,335,785)
------------
Net Assets--100%................. $ 52,297,367
------------
------------
</TABLE>
- ---------------
(a) Mortgage dollar roll, see Note 1.
(b) $2,000,000 of principal amount is a mortgage dollar roll, see Note 1.
See Notes to Financial Statements.
B-51
<PAGE>
THE PRUDENTIAL MONEY MARKET FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
BANK HOLDING PAPER--4.8%
Bank of New York, Inc.,
5.87%, 10/27/95
$ 2,800 (amortized cost $2,788,129)...... $ 2,788,129
------------
COMMERCIAL PAPER -
DOMESTIC--36.6%
Aristar, Inc.,
2,000 5.80%, 10/17/95.................. 1,994,844
800 5.82%, 10/19/95.................. 797,672
Caterpillar Financial Services
N.V.,
489 5.67%, 11/21/95.................. 485,072
Chrysler Financial Corp.,
400 5.85%, 10/27/95.................. 398,310
Countrywide Funding Corp.,
2,050 5.80%, 10/31/95.................. 2,040,092
Dayton Hudson Corp.,
2,800 5.78%, 10/25/95.................. 2,789,211
Finova Capital Corp.,
2,100 5.83%, 10/11/95.................. 2,096,599
735 5.90%, 11/2/95................... 731,145
Honeywell, Inc.,
470 5.80%, 11/13/95.................. 466,744
IBM Credit Corp.,
1,300 5.80%, 10/16/95.................. 1,296,858
ITT Corp.,
2,100 5.83%, 10/3/95................... 2,099,320
349 5.85%, 10/4/95................... 348,830
Nike Inc.,
988 6.75%, 10/2/95................... 987,815
Nynex Corp.,
2,800 6.80%, 10/2/95................... 2,799,471
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Public Service Elec. & Gas Co.,
$ 1,150 5.78%, 10/17/95.................. $ 1,147,046
Smith Barney, Inc.,
770 5.75%, 10/18/95.................. 767,909
------------
Total commercial paper - domestic
(amortized cost $21,246,938)..... 21,246,938
------------
CORPORATE BONDS--12.6%
Associates Corp. of North
America,
500 6.00%, 12/1/95................... 500,058
400 4.50%, 2/15/96................... 397,922
1,000 8.80%, 3/1/96.................... 1,008,706
Ford Motor Credit Corp.,
1,000 8.25%, 5/15/96................... 1,013,983
600 8.875%, 8/1/96................... 613,532
General Electric Co.,
840 7.875%, 5/1/96................... 849,202
General Motors Acceptance Corp.,
100 8.75%, 2/1/96.................... 100,850
Household Finance Corp.,
900 9.375%, 2/15/96.................. 908,981
International Lease Finance
Corp.,
430 6.875%, 12/15/95................. 430,568
375 6.625%, 6/1/96................... 376,208
NationsBank Corp.,
500 5.375%, 12/1/95.................. 499,554
Transamerica Finance Corp.,
600 8.55%, 6/15/96................... 610,567
------------
Total corporate bonds
(amortized cost $7,310,131)...... 7,310,131
------------
</TABLE>
See Notes to Financial Statements.
B-52
<PAGE>
THE PRUDENTIAL MONEY MARKET FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
DEPOSIT NOTES--2.6%
Society National Bank Cleveland,
$ 1,000 6.70%, 4/15/96................... $ 1,004,941
500 6.00%, 4/25/96................... 498,649
------------
Total deposit notes
(amortized cost $1,503,590)...... 1,503,590
------------
VARIABLE RATE OBLIGATIONS(a)--28.5%
American Express Centurion Bank,
1,000 6.26%, 10/2/95................... 1,000,245
Bank One Columbus N.A.,
2,700 6.08%, 10/2/95................... 2,698,150
FCC National Bank,
1,400 6.15%, 10/2/95................... 1,399,944
Ford Motor Credit Corp.,
200 6.14%, 12/18/95.................. 200,233
Goldman Sachs Group, L.P.,
2,700 6.00%, 10/30/95.................. 2,700,000
IBM Credit Corp.,
1,500 5.615%, 10/16/95................. 1,499,775
John Deere Capital Corp.,
1,000 6.095%, 10/23/95................. 1,001,783
John Deere Owner Trust,
1,460 5.8125%, 10/16/95................ 1,460,089
Key Bank New York,
1,400 6.49%, 10/2/95................... 1,398,953
Lehman Brothers, Inc.,
1,000 6.11%, 10/24/95.................. 1,000,000
Merrill Lynch & Co., Inc.,
500 5.885%, 10/2/95.................. 500,000
Money Market Auto Loan Trust,
700 6.005%, 10/16/95................. 700,000
Morgan Stanley Group, Inc.,
1,000 6.00%, 11/15/95.................. 1,000,000
------------
Total variable rate obligations
(amortized cost $16,559,172)..... 16,559,172
------------
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LOAN PARTICIPATIONS--4.8%
Engelhard Corp.,
$ 800 6.20%, 10/2/95................... $ 800,000
General Electric Capital Corp.,
2,000 6.00%, 10/2/95................... 2,000,000
------------
Total loan participations
(amortized cost $2,800,000)...... 2,800,000
------------
MEDIUM-TERM OBLIGATIONS--9.1%
Associates Corp. of North
America,
100 4.68%, 3/29/96................... 99,143
Deere & Co.,
1,000 8.47%, 3/18/96................... 1,011,224
Ford Motor Credit Corp.,
1,000 5.15%, 3/15/96................... 993,295
General Motors Acceptance Corp.,
2,100 4.80%, 11/15/95.................. 2,095,777
570 4.75%, 2/14/96................... 567,268
International Lease Finance
Corp.,
500 5.00%, 5/28/96................... 496,536
------------
Total medium-term obligations
(amortized cost $5,263,243)...... 5,263,243
------------
Total Investments--99.0%
(amortized cost
$57,471,203(b))................ 57,471,203
Other assets in excess of
liabilities--1.0%.............. 582,874
------------
Net Assets--100%................. $ 58,054,077
------------
------------
</TABLE>
- ---------------
(a) For purposes of amortized cost valuation, the maturity
date of these instruments is considered to be the next
date on which the security can be redeemed at par or the
next date on which the rate of interest is adjusted.
(b) The cost of securities for federal income tax purposes is
substantially the same as for financial reporting
purposes.
See Notes to Financial Statements.
B-53
<PAGE>
THE PRUDENTIAL MONEY MARKET FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
The industry classification of portfolio holdings and other net
assets shown as a percentage of net assets as of September 30,
1995 were as follows:
<TABLE>
<S> <C>
Personal Credit Institutions.......... 20.1%
Business Credit (Finance)............. 11.6
Bank Holding Co....................... 10.3
Security Brokers & Dealers............ 10.3
Commercial Banks...................... 9.1
Financial Services.................... 9.0
Telecommunications.................... 4.8
Variety Store......................... 4.8
Asset Backed.......................... 3.7
Mortgage Bankers...................... 3.5
Farm Machinery........................ 3.5
Equip. Rental & Leasing............... 2.2
Electric Services..................... 2.0
Footwear.............................. 1.7
Chemicals-Specialty................... 1.4
Regulating Controls................... 1.0
Other assets in excess of liabilities 1.0
-----
100.0%
-----
-----
</TABLE>
See Notes to Financial Statements.
B-54
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
------------ ------------ ------------- ------------ ----------- ----------- -----------
Assets
Investments, at value
(a)...................... $222,374,363 $ 96,471,101 $137,331,985 $133,506,023 $80,988,828 $57,633,152 $57,471,203
Cash....................... -- -- 184 417 872 897 440
Foreign currency, at value
(cost $153,643).......... -- -- 153,891 -- -- -- --
Receivable for investments
sold..................... 1,199,509 5,941,403 -- 176,030 1,133,257 -- --
Interest and dividends
receivable............... 162,987 206,021 404,440 641,767 685,304 563,134 386,072
Receivable for Fund shares
sold..................... 789,547 361,069 323,593 191,349 207,730 58,336 227,193
Due from Manager........... -- 1,754 -- -- -- 4,635 --
Deferred expenses and other
assets................... 29,670 32,252 29,485 30,735 28,919 31,988 30,486
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total assets........... 224,556,076 103,013,600 138,243,578 134,546,321 83,044,910 58,292,142 58,115,394
------------ ------------ ------------- ------------ ----------- ----------- -----------
Liabilities
Payable for investments
purchased................ 2,555,583 872,222 987,689 1,013,369 667,995 5,934,375 --
Payable for Fund shares
reacquired............... 1,286,353 85,455 314,389 46,984 155,532 11,863 34,386
Accrued expenses........... 77,378 70,888 148,784 51,045 44,922 42,870 16,633
Due to broker-variation
margin................... -- 29,670 -- -- -- -- --
Management fee payable..... 107,403 -- 92,756 68,472 57,582 -- 3,953
Administration fee
payable.................. 23,965 10,799 14,738 14,564 8,933 5,667 6,345
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total liabilities...... 4,050,682 1,069,034 1,558,356 1,194,434 934,964 5,994,775 61,317
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Assets................. $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 13,604 $ 7,169 $ 8,964 $ 10,703 $ 6,576 $ 5,238 $ 58,054
Paid-in capital in excess
of par................... 169,441,843 80,650,936 121,007,773 116,928,121 71,932,999 52,130,203 57,996,023
------------ ------------ ------------- ------------ ----------- ----------- -----------
169,455,447 80,658,105 121,016,737 116,938,824 71,939,575 52,135,441 58,054,077
Undistributed net
investment income........ -- 1,562,991 1,582,613 2,883,961 1,706,435 -- --
Accumulated net realized
gain (loss) on
investments.............. (3,016,003) 4,001,988 (3,235,336 ) 1,414,649 2,082,012 (732,600) --
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 54,065,950 15,721,482 17,321,208 12,114,453 6,381,924 894,526 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets, September 30,
1995..................... $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Shares of beneficial
interest issued and
outstanding.............. 13,604,202 7,168,801 8,964,457 10,703,173 6,575,791 5,237,904 58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net asset value per
share.................... $ 16.21 $ 14.22 $ 15.25 $ 12.46 $ 12.49 $ 9.98 $ 1.00
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a) Identified cost........ $168,308,413 $ 80,942,844 $120,016,426 $121,391,570 $74,606,904 $56,738,626 $57,471,203
</TABLE>
See Notes to Financial Statements.
B-55
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................. $ 198,002 $ 637,099 $ 499,812 $ 3,847,389 $ 2,407,512 $ 3,187,231 $ 3,128,647
Dividends (a)............ 1,190,186 1,623,115 3,287,355 896,599 560,304 -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total income........... 1,388,188 2,260,214 3,787,167 4,743,988 2,967,816 3,187,231 3,128,647
------------ ------------ ------------- ------------ ----------- ----------- -----------
Expenses
Management fee........... 1,049,893 286,843 1,367,665 733,748 496,395 231,931 236,009
Administration fee....... 201,075 96,138 159,439 140,527 95,069 62,187 70,311
Custodian's fees and
expenses................. 88,000 124,000 280,000 74,000 72,000 65,000 73,000
Registration fees........ 63,000 35,000 32,000 60,000 23,000 25,000 30,000
Transfer agent's fees and
expenses............... 36,092 17,256 28,618 25,224 17,064 11,162 12,621
Reports to
shareholders............. 25,000 25,000 25,000 13,000 25,000 13,000 13,000
Amortization of
organization
expenses............... 13,385 13,385 13,385 13,213 13,385 13,049 13,213
Legal fees............... 11,000 11,000 15,000 11,000 11,000 11,000 11,000
Audit fee................ 12,000 11,000 15,000 12,000 11,000 11,000 9,000
Trustees' fees........... 8,572 8,572 8,572 8,572 8,572 8,572 8,572
Miscellaneous............ 6,056 4,525 5,856 5,244 4,762 4,256 4,382
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total expenses......... 1,514,073 632,719 1,950,535 1,096,528 777,247 456,157 481,108
Expense subsidy (Note
2)..................... (14,225) (202,456) (47,700) (48,317) (68,112) (131,453) (166,428)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net expenses............... 1,499,848 430,263 1,902,835 1,048,211 709,135 324,704 314,680
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net investment income
(loss)................... (111,660) 1,829,951 1,884,332 3,695,777 2,258,681 2,862,527 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss)
on:
Securities............... 820,651 1,869,439 (2,892,161) 1,585,229 2,197,085 92,951 --
Futures transactions..... -- 2,175,415 -- -- -- -- --
Foreign currency
transactions............. (5,798) -- (192,785) -- (1,009) -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
814,853 4,044,854 (3,084,946) 1,585,229 2,196,076 92,951 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 47,538,274 13,632,300 9,333,213 12,809,504 6,413,335 2,865,097 --
Financial futures
contracts................ -- 282,600 -- -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
47,538,274 13,914,900 9,333,213 12,809,504 6,413,335 2,865,097 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net gain on investments and
foreign currencies....... 48,353,127 17,959,754 6,248,267 14,394,733 8,609,411 2,958,048 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................. $ 48,241,467 $ 19,789,705 $8,132,599 $ 18,090,510 $10,868,092 $ 5,820,575 $ 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a)Net of foreign withholding taxes of $26,902, $11,248, $461,615, $3,187, $10,097, respectively.
</TABLE>
See Notes to Financial Statements.
B-56
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL
STOCK INDEX STOCK
FUND FUND FUND
--------------------------- ---------------------------- -------------------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
--------------------------- ---------------------------- -------------------------
1995 1994 1995 1994 1995
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $(111,660) $25,287 $1,829,951 $892,321 $1,884,332
Net realized gain
(loss) on investments
and foreign currency
transactions......... 814,853 (3,778,648) 4,044,854 186,406 (3,084,946)
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 47,538,274 3,531,929 13,914,900 380,870 9,333,213
------------ ------------- ------------- ------------- ------------
Net increase (decrease)
in net assets
resulting from
operations........... 48,241,467 (221,432) 19,789,705 1,459,597 8,132,599
------------ ------------- ------------- ------------- ------------
Net equalization
credits................. -- 44,776 -- 289,937 --
------------ ------------- ------------- ------------- ------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (48,781) (43,709) (1,015,394) (481,228) (750,797)
------------ ------------- ------------ -------------- ------------
Distributions to
shareholders from net
realized gains....... -- (131,129) (165,297) (106,939) (2,440,090)
------------ ------------- ------------ -------------- ------------
Fund share transactions
Net proceeds from
shares sold.......... 138,943,130 80,605,272 52,960,096 29,356,230 93,624,206
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 48,781 174,838 1,180,691 588,167 3,190,887
Cost of shares
redeemed............. (73,635,171) (21,470,653) (20,924,559) (8,128,767) (67,895,915)
------------ ------------- ------------- ------------- ------------
Net increase in net
assets from Fund
share transactions... 65,356,740 59,309,457 33,216,228 21,815,630 28,919,178
------------ ------------- ------------ ------------- ------------
Net increase............ 113,549,426 58,957,963 51,825,242 22,976,997 33,860,890
Net Assets
Beginning of year...... 106,955,968 47,998,005 50,119,324 27,142,327 102,824,332
------------ ------------- ------------ ------------- ------------
End of year...... ...... $220,505,394 $106,955,968 $101,944,566 $50,119,324 $136,685,222
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
<CAPTION>
INTERNATIONAL ACTIVE
STOCK BALANCED
FUND FUND
--------------------------- ----------------------------
Year Ended September 30, Year Ended September 30,
--------------------------- ----------------------------
1994 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ 736,785 $ 3,695,777 $ 1,805,400
Net realized gain
(loss) on investments
and foreign currency
transactions........ . 2,235,681 1,585,229 119,065
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 5,701,535 12,809,504 (1,395,057)
------------- ------------- -------------
Net increase (decrease)
in net assets
resulting from
operations......... .. 8,674,001 18,090,510 529,408
------------- ------------- -------------
Net equalization
credits................. 695,692 -- 296,744
------------- ------------- -------------
Dividends and
distributions
Dividends to
shareholders from net
investment incom e.... (98,619) (2,260,245) (503,768)
------------- ------------- -------------
Distributions to
shareholders from net
realized gains....... (493,097) (272,788) (395,817)
------------- ------------- -------------
Fund share transactions
Net proceeds from
shares sold.......... 86,220,384 54,908,716 56,588,609
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 591,716 2,533,033 899,585
Cost of shares
redeemed............. (24,473,332) (20,823,769) (15,023,860)
------------- ------------- --------------
Net increase in net
assets from Fund
share transactions... 62,338,768 36,617,980 42,464,334
------------- ------------- --------------
Net increase............ 71,116,745 52,175,457 42,390,901
Net Assets
Beginning of year...... 31,707,587 81,176,430 38,785,529
------------- ------------- --------------
End of year............ $ 102,824,332 $ 133,351,887 $81,176,430
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See Notes to Financial Statements.
B-57
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
MONEY
BALANCED INCOME MARKET
FUND FUND FUND
------------------------------- ------------------------------- -------------------------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
------------------------------- ------------------------------- -------------------------------
1995 1994 1995 1994 1995 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment
income............... $ 2,258,681 $ 1,261,344 $ 2,862,527 $ 1,982,080 $ 2,813,967 $ 1,276,052
Net realized gain
(loss) on investments
and foreign currency
transactions......... 2,196,076 163,359 92,951 (826,533) -- 1,550
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 6,413,335 (1,878,445) 2,865,097 (2,659,530) -- --
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease)
in net assets
resulting from
operations........... 10,868,092 (453,742) 5,820,575 (1,503,983) 2,813,967 1,277,602
------------- ------------- ------------- ------------- ------------- -------------
Net equalization
credits................ -- 721,188 -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (1,529,788) (604,065) (2,862,527) (1,982,080) (2,813,967) (1,277,602)
------------- ------------- ------------- ------------- ------------- -------------
Distributions to
shareholders from net
realized gains....... (269,963) (735,383) -- (137,236) -- --
------------- ------------- ------------- ------------- ------------- -------------
Fund share transactions
Net proceeds from
shares sold.......... 26,091,264 42,441,610 11,549,255 15,768,473 55,919,976 32,311,167
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 1,799,751 1,339,448 2,862,527 2,119,316 2,813,967 1,277,602
Cost of shares
redeemed............. (19,161,993) (6,059,058) (6,473,780) (7,878,160) (47,010,598) (17,493,001)
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net
assets from Fund
share transactions... 8,729,022 37,722,000 7,938,002 10,009,629 11,723,345 16,095,768
------------- ------------- ------------- ------------- ------------- -------------
Net increase............ 17,797,363 36,649,998 10,896,050 6,386,330 11,723,345 16,095,768
Net Assets
Beginning of year...... 64,312,583 27,662,585 41,401,317 35,014,987 46,330,732 30,234,964
------------- ------------- ------------- ------------- ------------- -------------
End of year............ $ 82,109,946 $64,312,583 $52,297,367 $41,401,317 $ 58,054,077 $46,330,732
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
B-58
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
GROWTH STOCK
STOCK INDEX
FUND FUND
---------------------------------------------- ---------
November 5, Year Ended
1992(a) September
Year Ended September 30, Through 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 12.00 $ 12.10 $ 10.00 $ 11.27
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... -- -- .04 .23
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. 4.22 (.06) 2.08 2.97
--------- ------------- ------------- ---------
Total from investment operations............. 4.22 (.06) 2.12 3.20
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.01) (.01) (.02) (.22)
Distributions from net realized gains......... -- (.03) -- (.03)
--------- ------------- ------------- ---------
Total distributions........................... (.01) (.04) (.02) (.25)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 16.21 $ 12.00 $ 12.10 $ 14.22
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 35.14% (0.50)% 21.22% 29.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 220,505 $ 106,956 $47,998 $ 101,945
Average net assets (000)...................... $ 149,985 $ 71,449 $17,592 $ 71,711
Ratios to average net assets: (b)
Expenses..................................... 1.00% 1.00% 1.00%(c) .60%
Net investment income........................ (.07)% .04% .31%(c) 2.55%
Portfolio turnover rate....................... 64% 65% 84% 11%
<CAPTION>
STOCK
INDEX
FUND
--------------------------------
November 5,
1992(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.12 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .26 .23
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. .11 .94
------------- -------------
Total from investment operations............. .37 1.17
------------- -------------
Less distributions:
Dividends from net investment income.......... (.18) (.05)
Distributions from net realized gains......... (.04) --
------------- -------------
Total distributions........................... (.22) (.05)
------------- -------------
Net asset value, end of period................ $ 11.27 $ 11.12
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $50,119 $27,142
Average net assets (000)...................... $38,098 $18,807
Ratios to average net assets: (b)
Expenses..................................... .60% .60%(c)
Net investment income........................ 2.34% 2.41%(c)
Portfolio turnover rate....................... 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 distributions. Total return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies.
</TABLE>
See Notes to Financial Statements.
B-59
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
ACTIVE
BALANCED
INTERNATIONAL FUND
STOCK ---------
FUND
---------------------------------------------- Year
November 5, Ended
1992(a) September
Year Ended September 30, Through 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 14.84 $ 12.35 $ 10.00 $ 10.92
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... .18 .13 .16 .33
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. .66 2.54 2.21 1.54
--------- ------------- ------------- ---------
Total from investment operations............. .84 2.67 2.37 1.87
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.10) (.03) (.02) (.29)
Distributions from net realized gains......... (.33) (.15) -- (.04)
--------- ------------- ------------- ---------
Total distributions........................... (.43) (.18) (.02) (.33)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 15.25 $ 14.84 $ 12.35 $ 12.46
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 5.95% 21.71% 23.74% 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 136,685 $ 102,824 $31,708 $ 133,352
Average net assets (000)...................... $ 118,927 $ 68,476 $14,491 $ 104,821
Ratios to average net assets:(b)
Expenses..................................... 1.60% 1.60% 1.60%(c) 1.00%
Net investment income........................ 1.58% 1.08% 1.44%(c) 3.53%
Portfolio turnover rate....................... 20% 21% 15% 30%
<CAPTION>
ACTIVE
BALANCE
FUND
--------------------------------
January 4,
1993(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.05 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .24 .21
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. (.12) .84
------------- -------------
Total from investment operations............. .12 1.05
------------- -------------
Less distributions:
Dividends from net investment income.......... (.14) --
Distributions from net realized gains......... (.11) --
------------- -------------
Total distributions........................... (.25) --
------------- -------------
Net asset value, end of period................ $ 10.92 $ 11.05
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $81,176 $38,786
Average net assets (000)...................... $58,992 $12,815
Ratios to average net assets:(b)
Expenses..................................... 1.00% 1.00%(c)
Net investment income........................ 3.06% 2.68%(c)
Portfolio turnover rate....................... 40% 47%
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported
and includes reinvestment of dividends and distributions. Total return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies.
</TABLE>
See Notes to Financial Statements.
B-60
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
BALANCED INCOME
FUND FUND
---------------------------------------------- ---------
November 5,
1992(a) Year Ended
Year Ended September 30, Through September 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.08 $ 11.80 $ 10.00 $ 9.38
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... .18 .31 .31 .59
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. 1.53 (.52) 1.54 .60
--------- ------------- ------------- ---------
Total from investment operations............. 1.71 (.21) 1.85 1.19
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.25) (.23) (.05) (.59)
Distributions from net realized gains......... (.05) (.28) -- --
--------- ------------- ------------- ---------
Total distributions........................... (.30) (.51) (.05) (.59)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 12.49 $ 11.08 $ 11.80 $ 9.98
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 15.90% (1.88)% 18.58% 13.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $82,110 $64,313 $27,663 $52,297
Average net assets (000)...................... $70,914 $44,048 $17,401 $46,386
Ratios to average net assets: (b)
Expenses..................................... 1.00% 1.00% 1.00%(c) .70%
Net investment income........................ 3.19% 2.86% 3.16%(c) 6.17%
Portfolio turnover rate....................... 65% 52% 74% 145%
<CAPTION>
INCOME
FUND
--------------------------------
March 1,
1993(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 10.33 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .52 .27
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. (.91) .33
------------- -------------
Total from investment operations............. (.39) .60
------------- -------------
Less distributions:
Dividends from net investment income.......... (.52) (.27)
Distributions from net realized gains......... (.04) --
------------- -------------
Total distributions........................... (.56) (.27)
------------- -------------
Net asset value, end of period................ $ 9.38 $ 10.33
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... (3.91)% 6.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $41,401 $35,015
Average net assets (000)...................... $37,802 $25,626
Ratios to average net assets: (b)
Expenses..................................... .70% .70%(c)
Net investment income........................ 5.24% 4.62%(c)
Portfolio turnover rate....................... 83% 93%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods
of less than a full year are not annualized. Total return includes the
effect of expense subsidies.
See Notes to Financial Statements.
B-61
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
MONEY
MARKET
FUND
-----------------------------------------------------
January 4,
1993(a)
Year Ended September 30, Through
------------------------------- September 30,
1995 1994 1993
--------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized
gains(b)..................................... .05 .03 .02
Dividends from net investment income.......... (.05) (.03) (.02)
--------- ------------- -------------
Net asset value, end of period................ $ 1.00 $ 1.00 $ 1.00
--------- ------------- -------------
--------- ------------- -------------
TOTAL RETURN(d)............................... 5.47% 3.32% 2.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $58,054 $46,331 $30,235
Average net assets (000)...................... $52,446 $38,170 $25,296
Ratios to average net assets: (b)
Expenses..................................... .60% .60% .60%(c)
Net investment income........................ 5.37% 3.34% 2.73%(c)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods
of less than a full year are not annualized. Total return includes
the effect of expense subsidies.
See Notes to Financial Statements.
B-62
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The Prudential Institutional Fund (the "Company") is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. ("PIFM").
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
Securities, that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer. Forward currency
B-63
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
exchange contracts shall be valued at the current cost of covering or offsetting
such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
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 Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized 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.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange
B-64
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal year. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal year. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of net unrealized appreciation/depreciation on securities and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Equalization: During the fiscal year ended September 30, 1995, the Funds
(except for the Income and Money Market Funds) discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per-share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The following balances of undistributed net investment income at
September 30, 1994, resulting from equalization were transferred to paid-in
capital in excess of par for each of the respective Funds:
Growth Stock Fund $ 90,444
Stock Index Fund 398,227
International Stock Fund 881,462
Active Balanced Fund 788,116
Balanced Fund 899,912
Such reclassifications have no effect on net assets, results of operations,
or net asset value per share of the Funds.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the "ex-dividend" date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-65
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company 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.
For the year ended September 30, 1995, the application of this statement
affected undistributed net investment income ("UNI"), accumulated net realized
gain (loss) on investments ("G/L") and paid-in capital in excess of par
("PIC") by the following amounts:
<TABLE>
<CAPTION>
UNI G/L PIC
--------- -------- ---------
<S> <C> <C> <C>
Growth Stock Fund $ 141,451 $ 5,798 $(147,249)
International Stock Fund (81,325) 81,325 --
Active Balanced Fund (107,185) 107,185 --
Balanced Fund (112,634) 112,634 --
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation ("PIC"), Jennison Associates Capital Corp. ("Jennison") and
Mercator Asset Management, Inc. ("Mercator"), each a wholly-owned subsidiary
of Prudential. Each subadviser will furnish investment advisory services in
connection with the management of the various Funds. Jennison serves as
subadviser to the Growth Stock Fund and the Active Balanced Fund. PIC serves as
subadviser to the Balanced Fund, the Stock Index Fund, the Income Fund and the
Money Market Fund. Mercator serves as subadviser to the International Stock
Fund. PIFM will pay for the costs and expenses attributable to the subadvisory
agreements and the salaries and expenses of all personnel of the Company except
for fees and expenses of unaffiliated Trustees. The Funds will bear all other
costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
Fund Management Fee
- -------------------------- ---------------
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so
B-66
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
long as the total expense ratios do not exceed certain predetermined levels set
forth in the Company's prospectus. For the year ended September 30, 1995, PIFM
subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- ------------------------- ------------- ------------------
<S> <C> <C>
Growth Stock Fund .01% $ .001
Stock Index Fund .28 .025
International Stock Fund .04 .002
Active Balanced Fund .05 .004
Balanced Fund .10 .005
Income Fund .28 .027
Money Market Fund .32 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. ("PMF"), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. ("PMFS"). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Other Transactions with Affiliates
For the year ended September 30, 1995, Prudential Securities Incorporated, an
affiliate of PIFM, earned approximately $1,000 in brokerage commissions from
portfolio transactions executed on behalf of the Balanced Fund.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $166,285,606 $94,901,288
Stock Index Fund 31,191,257 6,793,307
International Stock Fund 51,878,167 22,058,837
Active Balanced Fund 55,254,010 24,449,598
Balanced Fund 51,413,549 41,017,407
Income Fund 72,942,188 62,818,679
</TABLE>
On September 30, 1995, the Stock Index Fund purchased 62 financial futures
contracts on the S&P 500 Index expiring December, 1995. The cost of such
contracts was $18,040,975. The value of such contracts on September 30, 1995 was
$18,234,200, thereby resulting in an unrealized gain of $193,225.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/ Gross Unrealized
Fund Basis Depreciation Appreciation Depreciation
- ------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $168,492,267 $ 53,882,096 $55,631,552 $1,749,456
Stock Index Fund 80,984,245 15,486,856 16,243,442 756,586
International Stock
Fund 120,016,426 17,315,559 19,620,167 2,304,608
Active Balanced
Fund 121,485,163 12,020,860 12,744,154 723,294
Balanced Fund 74,648,132 6,340,696 6,845,882 505,186
Income Fund 56,738,626 894,526 1,086,048 191,522
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1994 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund $3,796,000 --
International Stock Fund -- $186,000
Income Fund 828,000 --
</TABLE>
B-67
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
Growth Stock Fund $2,825,300
Income Fund 723,300
The average monthly balance of dollar rolls outstanding during the year ended
September 30, 1995 for the Income Fund was approximately $4,142,000. The amount
of dollar rolls outstanding at September 30, 1995 was $5,940,665, which was
10.2% 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. At September 30,
1995, the Company had a 9.01% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $65,929,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .66% $ 4,819,000
Stock Index Fund 1.71 12,494,000
International Stock Fund 1.12 8,175,000
Active Balanced Fund 3.50 25,625,000
Balanced Fund 1.00 7,338,000
Income Fund 1.02 7,478,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.375%, in the principal amount of $225,000,000,
repurchase price $225,119,531, due 10/2/95. The value of the collateral
including accrued interest was $229,660,959.
BT Securities Corp., 6.10%, in the principal amount of $56,863,000,
repurchase price $56,891,905, due 10/2/95. The value of the collateral including
accrued interest was $58,082,904.
Goldman, Sachs & Co., 6.45%, in the principal amount of $225,000,000,
repurchase price $225,120,938, due 10/2/95. The value of the collateral
including accrued interest was $229,500,013.
Smith Barney, Inc., 6.43%, in the principal amount of $225,000,000,
repurchase price $225,120,563, due 10/2/95. The value of the collateral
including accrued interest was $229,500,366.
Note 6. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the years ended
September 30, 1995 and 1994 were as follows:
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
B-68
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Year ended September 30, 1994:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 6,739,890 14,450 (1,804,735) 4,949,605
Stock Index Fund 2,697,792 52,328 (744,579) 2,005,541
International Stock
Fund 6,022,403 42,326 (1,702,734) 4,361,995
Active Balanced Fund 5,244,905 81,781 (1,404,380) 3,922,306
Balanced Fund 3,900,150 118,117 (556,779) 3,461,488
Income Fund 1,613,971 216,368 (809,032) 1,021,307
Money Market Fund 32,311,167 1,277,602 (17,493,001) 16,095,768
</TABLE>
Of the shares outstanding at September 30, 1995, PIFM and affiliates owned
the following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 4,724,608
Stock Index Fund 3,429,256
International Stock Fund 4,962,191
Active Balanced Fund 2,396,951
Balanced Fund 3,356,418
Income Fund 2,889,945
Money Market Fund 27,811,405
</TABLE>
B-69
<PAGE>
THE PRUDENTIAL INDEPENDENT
(LOGO) INSTITUTIONAL AUDITORS' REPORT
FUND
The Shareholders and Trustees of
The Prudential Institutional Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Prudential Institutional Fund
(consisting of the Growth Stock Fund, Stock Index Fund, International Stock
Fund, Active Balanced Fund, Balanced Fund, Income Fund and Money Market Fund),
as of September 30, 1995, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1995, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting The Prudential Institutional Fund as of
September 30, 1995, the results of their operations, the changes in their net
assets, and the financial highlights for the periods presented in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 16, 1995
B-70
<PAGE>
APPENDIX
DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
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.
Ba - Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well-safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
A-1
<PAGE>
Description of Duff & Phelps Bond Ratings:
AAA - Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+, AA, AA--Bonds rated AA+, AA or AA-are considered to be of high credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions.
A+, A, A--Bonds rated A+, A or A-have protection factors which are average
but adequate; however, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB--Bonds rated BBB+, BBB or BBB-have below average protection
factors but are still considered sufficient for prudent investment. These bonds
demonstrate considerable variability in risk during economic cycles.
BB+, BB, BB--Bonds rated BB+, BB, or BB-are below investment grade but are
still deemed likely to meet obligations when due. Present or prospective
financial protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently within this
category.
B+, B, B--Bonds rated B+, B, or B-are below investment grade and possess
the risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC - Bonds rated CCC are well below investment grade securities.
Considerable uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD - Bonds rated DD are defaulted debt obligations. The issuer failed to
meet scheduled principal and/or interest payments.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of Duff & Phelps Commercial Paper 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 factors are excellent and
supported by strong fundamental protection factors, risk factors are minor; Duff
1 minus-high certainty of timely payment, liquidity factors are strong and
supported by good fundamental protection factors, risk factors are very small.
Issues rated Duff 2 represent a good certainty of timely payment; liquidity
factors and company fundamentals are sound; although ongoing internal funds
needs may enlarge total financing requirements, access to capital markets is
good; risk factors are small. Duff 3 represents a satisfactory grade;
satisfactory liquidity and other protection factors qualify issue as to
investment grade; risk factors are larger and subject to more variation;
nevertheless timely payment is expected.
A-2
