<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION NO. 333-38087
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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
[_]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [_]
(Check appropriate box or boxes)
----------------
PRUDENTIAL JENNISON SERIES FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(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 DECEMBER 20, 1997
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 PREVIOUSLY HAS REGISTERED AN
INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $.01 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 ENDED SEPTEMBER 30,
1997 ON OR BEFORE DECEMBER 29, 1997.
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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 Cover Page
Prospectus..........................
Item 2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus..................
Item 3. Fee Table, Synopsis Information and Synopsis; Principal Risk
Risk Factors........................ Factors
Item 4. Information about the Transaction... Synopsis; The Proposed
Transaction
Item 5. Information about the Registrant.... Synopsis; Information About
Jennison Series Fund;
Miscellaneous
Item 6. Information about the Company Being
Acquired............................ Synopsis; Information About
Active Balanced 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 Series Fund, Inc.
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>
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
----------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (Meeting) of
Prudential Active Balanced Fund (Active Balanced Fund), a portfolio of
Prudential Dryden Fund, will be held at 9:00 a.m., eastern time, on January
15, 1998, at Prudential Plaza, 751 Broad Street, Newark, New Jersey 07102-
3777, for the following purposes:
1. To approve an Agreement and Plan of Conversion and Liquidation
whereby all of the assets of Active Balanced Fund will be transferred
to the Prudential Jennison Active Balanced Fund of Prudential Jennison
Series Fund, Inc. (the Portfolio) in exchange solely for Class A, Class
B, Class C and Class Z shares of the Portfolio and the Portfolio's
assumption of all of the liabilities, if any, of Active Balanced 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 beneficial interest in Active Balanced Fund of
record at the close of business on November 7, 1997, are entitled to notice of
and to vote at this Meeting or any adjournment thereof.
S. Jane Rose
Secretary
Dated: November 24, 1997
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 SERIES FUND, INC.--PRUDENTIAL JENNISON ACTIVE BALANCED
FUND
PROSPECTUS
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
AND
PRUDENTIAL DRYDEN FUND--PRUDENTIAL ACTIVE BALANCED FUND
PROXY STATEMENT
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
----------------
Prudential Dryden Fund (PDF) is an open-end, diversified, management
investment company consisting of six portfolios, one of which is Prudential
Active Balanced Fund (Active Balanced Fund). Prudential Jennison Series Fund,
Inc. (Jennison Series Fund) is an open-end, diversified, management investment
company comprised of three portfolios, one of which is the newly created
Prudential Jennison Active Balanced Fund (the Portfolio). Both PDF and
Jennison Series Fund are managed by Prudential Investments Fund Management
LLC. The Portfolio presently holds no portfolio securities and has not yet
begun investment operations. If approved by the Active Balanced Fund
shareholders, the Portfolio will acquire Active Balanced Fund's assets and
assume its liabilities. The Portfolio has adopted an identical investment
objective and substantially identical investment policies to Active Balanced
Fund. 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.
This Prospectus and Proxy Statement is being furnished to shareholders of
Active Balanced Fund in connection with the solicitation of proxies by PDF's
Board of Trustees for use at a special meeting of Active Balanced Fund
shareholders to be held on January 15, 1998, at 9:00 a.m., eastern time, and
at any adjournment thereof (Meeting). The primary purpose of the Meeting is to
vote on a proposed Agreement and Plan of Conversion and Liquidation (Plan),
whereby the Portfolio will acquire all of the assets of Active Balanced Fund
and assume all of the liabilities, if any, of Active Balanced Fund. If the
Plan is approved by Active Balanced Fund's shareholders, all such shareholders
will be issued Class A, Class B, Class C and Class Z shares of the Portfolio
in exchange for the Class A, Class B, Class C and Class Z shares,
respectively, of Active Balanced Fund held by them, and Active Balanced Fund
will be terminated.
This Prospectus and Proxy Statement sets forth concisely information about
the Portfolio that prospective investors should know before investing. SHARES
OF THE PORTFOLIO WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON OR ABOUT
JANUARY 23, 1998. Additional information contained in a Statement of
Additional Information (SAI), dated November 24, 1997, relating to the Plan
has been filed with the Securities and Exchange Commission (SEC), is
incorporated herein by reference and is available without charge upon request
to the address or toll-free phone number shown above. A Prospectus of Active
Balanced Fund dated November 29, 1996, including June 18, 1997 and September
8, 1997 Supplements thereto, and an SAI for PDF dated June 18, 1997, also have
been filed with the SEC and are incorporated by reference herein. The Active
Balanced Fund Prospectus and the PDF SAI are available without charge upon
request to PDF at the address or toll-free phone number 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 NOR HAS THE 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 November 24, 1997.
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.--PRUDENTIAL JENNISON ACTIVE BALANCED
FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
PRUDENTIAL DRYDEN FUND--PRUDENTIAL ACTIVE BALANCED FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
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PROSPECTUS AND PROXY STATEMENT DATED NOVEMBER 24, 1997
----------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Conversion and Liquidation (Plan) and is qualified by reference to the more
complete information contained herein as well as in the Prospectus of
Prudential Active Balanced Fund (Active Balanced Fund), a series of Prudential
Dryden Fund (PDF). (The Active Balanced Fund and Prudential Jennison Active
Balanced Fund (the Portfolio), a series of Prudential Jennison Series Fund,
Inc. (Jennison Series Fund), sometimes are referred to herein individually as
a Series and collectively as the Series.) Shareholders should read this entire
Prospectus and Proxy Statement carefully.
GENERAL
This Prospectus and Proxy Statement is furnished by the Board of Trustees of
PDF in connection with the solicitation of proxies for use at a Special
Meeting of Shareholders of Active Balanced Fund (Meeting) to be held at 9:00
a.m., eastern time, on January 15, 1998 at Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102-3777. The purpose of the Meeting is to approve or
disapprove the Plan, pursuant to which all of the assets of Active Balanced
Fund will be acquired by, and all of the liabilities of Active Balanced Fund,
if any, will be assumed by, the Portfolio, 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 in summary provide that the Portfolio
will acquire all of Active Balanced Fund's assets in exchange solely for Class
A, Class B, Class C and Class Z shares of the Portfolio and the Portfolio's
assumption of all of the liabilities, if any, of Active Balanced Fund. The
Class A, Class B, Class C and Class Z shares of the Portfolio thereafter will
be distributed to the former shareholders of Active Balanced Fund, and Active
Balanced Fund will be terminated.
Approval of the Plan requires the affirmative vote of a majority of
outstanding voting securities of Active Balanced Fund, as defined in the
Investment Company Act of 1940, as amended (Investment Company Act). See
"Voting Information."
THE PROPOSED CONVERSION AND LIQUIDATION
The Board of Trustees of PDF, on behalf of Active Balanced Fund, and the
Board of Directors of Jennison Series Fund, on behalf of the Portfolio (each,
a Board), have approved the Plan, which provides for the transfer of all of
the assets of Active Balanced Fund to the Portfolio in exchange solely for
Class A, Class B, Class C and Class Z shares of the Portfolio and the
assumption by the Portfolio of all of the liabilities, if any, of Active
Balanced Fund. If the Plan is approved by the Active Balanced Fund
shareholders, Class A, Class B, Class C
2
<PAGE>
and Class Z shares of the Portfolio will be distributed to shareholders of
Active Balanced Fund, and Active Balanced Fund will be terminated. (All of the
foregoing transactions are sometimes referred to herein as the Conversion.) It
is expected that the Conversion will become effective on or about January 23,
1998 (Closing Date). IF THE CONVERSION IS CONSUMMATED, EACH ACTIVE BALANCED
FUND SHAREHOLDER WILL RECEIVE THE NUMBER OF FULL AND FRACTIONAL CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES OF THE PORTFOLIO (ROUNDED TO THE THIRD DECIMAL
PLACE) EQUAL TO THE NUMBER OF SUCH SHAREHOLDER'S CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF ACTIVE BALANCED FUND AS OF THE CLOSING DATE.
For the reasons set forth below under "--Reasons for the Proposed
Conversion" and "The Proposed Transaction--Reasons for the Conversion," the
Board of PDF, including those Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act) of PDF or Jennison Series
Fund (Independent Trustees), has determined that the Conversion is in the best
interests of Active Balanced Fund and that the interests of the existing
shareholders of Active Balanced Fund will not be diluted as a result of the
Conversion. The Board of Jennison Series Fund, including those Directors who
are not interested persons of PDF or Jennison Series Fund (Independent
Directors), similarly has determined that the Conversion is in the best
interests of Jennison Series Fund and that the interests of existing
shareholders of Jennison Series Fund will not be diluted as a result of the
Conversion. ACCORDINGLY, PDF'S BOARD RECOMMENDS APPROVAL OF THE PLAN.
REASONS FOR THE PROPOSED CONVERSION
The Board of PDF has concluded, based on information presented by Active
Balanced Fund's manager, Prudential Investments Fund Management LLC (PIFM),
that the Conversion is in the best interests of Active Balanced Fund and its
shareholders. The following are among the reasons for the Conversion:
. ACTIVE BALANCED FUND IS THE ONLY PORTFOLIO OUT OF SIX SERIES THAT IS NOT
AN INDEX PORTFOLIO. Earlier this year, at PIFM's recommendation, the PDF
Trustees approved the creation of four new series of PDF, each of which is an
index fund. PDF now consists of five index portfolios and Active Balanced
Fund. In order to avoid investor confusion, and from a marketing and
administrative position, it makes more sense to have all index portfolios as
part of the same fund, and to offer Active Balanced Fund as a portfolio of a
fund whose other portfolios are more similar to it.
. EACH PORTFOLIO OF JENNISON SERIES FUND WILL BE SUBADVISED BY JENNISON
ASSOCIATES CAPITAL CORP. (JENNISON ASSOCIATES). The investment adviser to
Active Balanced Fund is Jennison Associates, a wholly-owned subsidiary of The
Prudential Insurance Company of America (Prudential). Jennison Associates also
is the investment adviser to the other two series of Jennison Series Fund.
Again from a marketing and administrative position, it makes more sense to
have the portfolios of all the Prudential Mutual Funds that are subadvised by
Jennison Associates as part of one fund. If the Active Balanced Fund
shareholders approve the Plan, initial shares of the Portfolio will be sold to
PIFM prior to the Conversion so that PIFM can approve a Management Agreement
with PIFM and Subadvisory Agreement with Jennison Associates, each of which is
virtually identical (apart from the name of the Series and the date of the
agreement) to those currently in place for Active Balanced Fund. Indeed,
Jennison Associates would be paid at the same rate for providing investment
advisory services to the Portfolio as it is currently for Active Balanced
Fund. This is the same rate Jennison Associates is paid for providing
investment advisory services to the other two portfolios of Jennison Series
Fund.
.THE PROPOSED CONVERSION IS SUITABLE FOR EACH SERIES BECAUSE THEY ARE
SUBSTANTIALLY IDENTICAL APART FROM THEIR STATE OF ORGANIZATION. Each is a
portfolio of an open-end, diversified, management investment company. The
Portfolio is a newly created series of Jennison Series Fund, and its
operations will be modeled
3
<PAGE>
after those of Active Balanced Fund. Accordingly, the investment objective of
the Portfolio is identical to that of Active Balanced Fund, as are the
investment policies, with the exception of one investment restriction. The
Portfolio has not yet begun investment operations. If the Plan is approved by
the Active Balanced Fund shareholders, the Portfolio will acquire all of
Active Balanced Fund's assets and assume all of its liabilities.
Bradley Goldberg, an Executive Vice President of Jennison Associates, would
continue as portfolio manager, a position he has held since the inception of
Active Balanced Fund in January 1993. Mr. Goldberg also serves as portfolio
manager of Prudential Jennison Growth & Income Fund, another series of
Jennison Series Fund. He would continue to be assisted by associate portfolio
managers Peter Reinemann and G. Todd Silva, each of whom also serves as an
assistant portfolio manager to Prudential Jennison Growth & Income Fund.
STRUCTURE OF THE SERIES
PDF is authorized to issue an unlimited number of shares of beneficial
interest. Each Active Balanced Fund share issued has a pro rata interest in
the assets of Active Balanced Fund and has no interest in the assets of any
other series of PDF. Active Balanced Fund bears its own liabilities and its
proportional share of the general liabilities of PDF and is not responsible
for the liabilities of any other series of PDF. Active Balanced Fund is
divided into four classes designated Class A, Class B, Class C and Class Z.
Each class of shares of Active Balanced Fund represents an interest in the
same assets of the Fund and is identical in all respects except that (i) each
class (with the exception of Class Z shares) is subject to different sales
charges and distribution and/or service fees, which may affect performance,
(ii) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion
feature and (v) Class Z shares are offered exclusively for sale to a limited
group of investors.
Jennison Series Fund is authorized to issue 3 billion shares of common
stock, divided into three series. Each Jennison Series Fund series is divided
into four classes designated Class A, Class B, Class C and Class Z. There are
250 million authorized shares allocated to each of the four classes of shares
in each series of Jennison Series Fund. Each class of shares will represent an
interest in the same assets of the Portfolio and will be identical in all
respects except that (i) each class will be subject to different sales charges
and distribution and/or service fees (except for Class Z shares, which will
not be subject to any sales charges and distribution and/or service fee),
which may affect performance, (ii) each class will have exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and will have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class will have a different exchange privilege,
(iv) only Class B shares will have a conversion feature and (v) Class Z shares
will be offered exclusively for sale to a limited group of investors. In
accordance with Jennison Series Fund's Articles of Incorporation and PDF's
Declaration of Trust, each 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 Board may determine.
The Board of Jennison Series Fund may increase or decrease the number of
authorized shares without shareholder approval. Shares of each Series, 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
Series under certain circumstances. Except for the conversion feature
applicable to Class B shares (which convert to Class A shares
4
<PAGE>
after approximately seven years), there are no conversion, preemptive or other
subscription rights. In the event of liquidation of either Series, each share
thereof is entitled to its portion of that Series' assets after all of its
debts and expenses have been paid. Neither Series' shares have cumulative
voting rights for the election of Trustees/Directors.
INVESTMENT OBJECTIVES AND POLICIES
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. The Portfolio has an identical investment objective
and identical investment policies, with the exception of one investment
restriction, to those of Active Balanced Fund. For a discussion of these
investment objectives and policies, see "Information About the Portfolio--
Investment Objective and Policies" provided below.
CERTAIN DIFFERENCES BETWEEN THE SERIES
The investment objective and the investment policies of the Portfolio will
be identical to those of Active Balanced Fund (with the exception of one
investment restriction), so the difference between the Series is in their form
of organization and the fact that the Portfolio currently has no assets.
Active Balanced Fund is a series of a Delaware business trust and the
Portfolio is a series of a Maryland corporation. See "The Proposed
Transaction--Certain Comparative Information About Jennison Series Fund and
PDF."
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the manager of Active Balanced Fund, is compensated
pursuant to a management agreement with PDF, at an annual rate of .65 of 1% of
Active Balanced Fund's average daily net assets. PIFM, manager of the
Portfolio, will be compensated pursuant to a management agreement with the
Jennison Series Fund at the same rate.
Under a subadvisory agreement between PIFM and Jennison Associates, Jennison
Associates manages the portfolio securities of Active Balanced Fund and is
compensated by PIFM at an annual rate of .30 of 1% of the average daily net
assets of Active Balanced Fund up to and including $300 million and .25 of 1%
of the average daily net assets in excess of $300 million. Under a subadvisory
agreement between PIFM and Jennison Associates, Jennison Associates will
manage the portfolio securities of the Portfolio and will receive the same
rate of compensation from PIFM as it currently receives for investment
advisory services provided to the Active Balanced Fund. Under the terms of
each subadvisory agreement, this fee is or will be computed daily and paid
monthly. PIFM continues to have responsibility for all investment advisory
services pursuant to its respective management agreements and supervises
Jennison Associates' performance of its services.
Pursuant to a separate subadvisory agreement between PIFM and The Prudential
Investment Corporation (PIC), PIFM has retained PIC to provide investment
subadvisory services to Active Balanced Fund with respect to (i) the
management of short-term assets, including cash, money market instruments and
repurchase agreements and (ii) the lending of portfolio securities in
connection with the management of Active Balanced Fund. For these services,
PIFM will reimburse PIC for reasonable costs and expenses incurred by PIC
determined in a manner acceptable to PIFM. PIFM similarly intends to enter
into a subadvisory agreement with PIC on behalf of the Portfolio under the
same terms and to provide the same services to the Portfolio. PIC and Jennison
Associates each are direct, wholly owned subsidiaries of Prudential.
5
<PAGE>
DISTRIBUTION FEES. Prudential Securities Incorporated (PSI or Prudential
Securities), One Seaport Plaza, New York, New York 10292, serves or is to
serve as the distributor of Class A, Class B, Class C and Class Z shares of
Active Balanced Fund and the Portfolio. PSI is a wholly owned subsidiary of
Prudential and a corporation organized under the laws of the State of
Delaware. No distribution or service fees are paid by Active Balanced Fund's
Class Z shares or will be paid to PSI by the Portfolio's Class Z shares. The
offering of Class A, Class B and Class C shares of Active Balanced Fund
commenced October 31, 1996.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by PDF under Rule
12b-1 under the Investment Company Act and a distribution agreement (the
Distribution Agreement), PSI incurs the expenses of distributing Active
Balanced 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 representatives of 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 PSI, 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
Active Balanced Fund shares, including lease, utility, communications and
sales promotion expenses.
Under the Plans, Active Balanced Fund is obligated to pay distribution
and/or service fees to PSI as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If PSI's
expenses exceed its distribution and service fees, Active Balanced Fund will
not be obligated to pay any additional expenses. If PSI's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
Under the Class A Plan, Active Balanced Fund may pay PSI for its
distribution-related activities 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. PSI 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, 1998.
Under the Class B and Class C Plans, Active Balanced Fund pays PSI for its
distribution-related activities with respect to Class B and Class C shares at
an annual rate of up to 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 PSI of (i) an asset-based sales charge of .75 of 1% of the average
daily net assets of each of the Class B and Class C shares 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. PSI also receives contingent deferred
sales charges from certain redeeming shareholders.
The Board of Jennison Series Fund has approved separate Distribution and
Service Plans for Class A, Class B and Class C shares that will apply to the
Portfolio, which are virtually identical to the Active Balanced Fund Plans.
Similarly, the Jennison Series Fund distribution agreement is virtually
identical to the Active Balanced Fund Distribution Agreement. PSI 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, 1998.
TRANSFER AGENCY FEES. Each Series, pursuant to a Transfer Agency and Service
Agreement, pays or will pay Prudential Mutual Fund Services LLC (PMFS) an
annual fee per shareholder account of $9.50, a new
6
<PAGE>
account set-up fee for each manually established account of $2.00 and a
monthly inactive zero balance account fee per shareholder account of $0.20.
PMFS also is reimbursed for its out-of-pocket expenses, including postage,
stationery, printing, allocable communications expenses and other costs.
OTHER EXPENSES. Each Series also pays or will pay certain other expenses in
connection with its operation, including accounting, custodian, reports to
shareholders, legal, audit and share registration expenses.
EXPENSE RATIOS, FEE WAIVERS AND SUBSIDY. PIFM may from time to time waive
all or a portion of its management fee and subsidize all or a portion of the
operating expenses of Active Balanced Fund and the Portfolio, respectively.
Fee waivers and expense subsidies may increase a Series' yield and total
return. Any fee waiver or subsidy may be terminated at any time without
notice, after which a Series' expenses may increase and its yield and total
return may be reduced. Apart from the agreement by PSI to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% for the
fiscal year ending September 30, 1998, it is not anticipated that the
Portfolio's expenses will be subject to any fee waiver or subsidy in the near
future.
For the fiscal year ended September 30, 1997, total expenses stated as a
percentage of average net assets of Active Balanced Fund were 1.06% for Class
Z shares. For the period November 7, 1996 (commencement of investment
operations) through September 30, 1997, annualized total expenses as a
percentage of average net assets for Class A, Class B and Class C shares were
1.31%, 2.06% and 2.06%, respectively.
The Portfolio has not yet commenced operations. Estimated total operating
expenses for the Portfolio Class A, Class B, Class C and Class Z shares are
1.31%, 2.06%, 2.06% and 1.06%, respectively, for the fiscal year ending
September 30, 1998, as a percentage of average net assets.
Each Series' shareholder transaction expenses are shown below. Note that
they are the same for the same class of each Series. THERE WILL NOT BE ANY
SHAREHOLDER TRANSACTION FEE PAYABLE IN CONNECTION WITH THE CONVERSION.
<TABLE>
<CAPTION>
ACTIVE BALANCED FUND AND THE PORTFOLIO
------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
SHARES SHARES SHARES SHARES
------- ------------------------- ---------------------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions made None
decreasing by 1% within one year of
annually to 1% in the purchase.
fifth and sixth years and
0% the seventh year.*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
</TABLE>
- --------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase.
7
<PAGE>
Set forth below are Active Balanced Fund's operating expenses for the fiscal
year ended September 30, 1997.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
EXPENSES -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(as a percentage of av-
erage net assets)
Management Fees........ .65% .65% .65% .65%
12b-1 Fees (After Re-
duction).............. .25%+ 1.00% 1.00% None
Other Expenses......... .41% .41% .41% .41%
---- ---- ---- ----
Total Fund Operating
Expenses (After Reduc-
tion)................. 1.31%++ 2.06%++ 2.06%++ 1.06%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
Class A................................................ $63 $89 $118 $200
Class B................................................ $71 $95 $121 $211
Class C................................................ $31 $65 $111 $239
Class Z................................................ $11 $34 $ 58 $129
You would pay the following expenses on the same invest-
ment, assuming no redemption:
Class A................................................ $63 $89 $118 $200
Class B................................................ $21 $65 $111 $211
Class C................................................ $21 $65 $111 $239
Class Z................................................ $11 $34 $ 58 $129
</TABLE>
- --------
+ Although the Class A Distribution and Service Plan provides that the Series
may pay a distribution fee of up to .30% per annum of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares 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, 1998. Total Fund Operating Expenses would be 1.36%
absent this limitation with respect to Class A shares.
++ Annualized
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 Active Balanced Fund and the
Portfolio will bear, whether directly or indirectly.
PURCHASE OF SHARES
Investors may purchase shares of the Series through Prudential Securities,
Prusec or directly from the Series, through PMFS. The purchase price is the
net asset value (NAV) next determined following receipt of an order by PMFS or
PSI plus a sales charge which, at the investor's option, may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors without any sales charge. No sales charges will be imposed in
connection with the Conversion.
8
<PAGE>
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
AMOUNT OF PURCHASE 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>
PSI may reallow the entire initial sales charge to dealers. Selling dealers
may be deemed to be underwriters, as that term is defined in the Securities
Act of 1933, as amended (Securities Act).
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), PIFM, PMFS or one of their affiliates will pay dealers,
financial advisers and other persons that distribute shares a finders' fee
from its own resources based on a percentage of the net asset value of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of each
Series 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.
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 of 1986, as
amended (Internal Revenue Code) and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Internal Revenue Code (collectively,
Benefit Plans), provided that the Benefit Plan has existing assets of at least
$1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
250 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with PMFS or Prudential Securities and for which
PMFS 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.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Series is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential
9
<PAGE>
serves as plan administrator or recordkeeper are aggregated in meeting the $1
million threshold. The term "existing assets" as used herein includes stock
used by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray or
SmartPath Program. "Existing assets" also include monies invested in The
Guaranteed Interest Account (GIA), a group annuity insurance product issued by
Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares may also be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (i) the purchase is made with
the proceeds of a redemption from either GIA or SVF and (ii) Class A shares
are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified plan(s) or non-qualified plans so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at
least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (i)
employees who open an IRA or Savings Accumulation Plan account with the Fund's
transfer agent and (ii) spouses of employees who open an IRA account with the
Fund's transfer agent. The program is offered to companies that have at least
250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including each Series), (b) employees
of Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of
the Prudential Mutual Funds provided that purchases at NAV are permitted by
such person's employer, (d) Prudential, employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (e) 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, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than
a fund which imposes a distribution or service fee of .25 of 1% or less) and
(iii) the financial adviser served as the client's broker on the previous
purchase and (g) investors in Individual Retirement Accounts, provided the
purchase is made with the proceeds of a tax-free rollover of assets from a
Benefit Plan for which Prudential Investments serves as the recordkeeper or
administrator. Investors must notify
10
<PAGE>
the Transfer Agent either directly or through Prudential Securities or Prusec
that they are entitled to the reduction or waiver of the sales charge. The
reduction or waiver will be granted subject to confirmation of an investor's
entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions.
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 or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a contingent deferred sales charge
(CDSC). PSI will pay sales commissions of up to 4% of the purchase price of
Class B shares to dealers, financial advisers and other persons who sell Class
B shares at the time of sale from its own resources. This facilitates the
ability of each Series to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. PSI anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC
and the distribution fee. In connection with the sale of Class C shares, PSI
will pay dealers, financial advisers and other persons that distribute Class C
shares a commission of up to 1% of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are currently 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 either Fund is an available option (collectively, Benefit Plans),
provided that such Benefit Plans (in combination with other plans sponsored by
the same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or
trust program sponsored by Prudential Securities, The Prudential Savings Bank,
F.S.B. (or any affiliate) which includes mutual funds as investment options
and for which either Fund is an available option; (iii) certain participants
in the MEDLEY Program (group variable annuity contracts) sponsored by
Prudential for whom Class Z shares of the Prudential Mutual Funds are an
available investment option; (iv) Benefit Plans for which Prudential
Retirement Services serves as recordkeeper and as of September 20, 1996, (a)
were Class Z shareholders of the Prudential Mutual Funds, or (b) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual Funds;
(v) current and former Directors/Trustees of the Prudential Mutual Funds
(including either Fund); and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares. There are no sales charges associated
with the purchase or redemption of Class Z shares.
REDEMPTIONS--HOW TO SELL YOUR SHARES
Shares of each Series may be redeemed at any time for cash at the NAV next
determined after the redemption request is received in proper form by PMFS or
Prudential Securities. In certain cases, however,
redemption proceeds will be reduced by the amount of any applicable contingent
deferred sales charge, as described below.
Redemption 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 the investor.
11
<PAGE>
The CDSC will be imposed on any redemption which reduces the current value of
the investor's Class B or Class C shares to an amount which is lower than the
amount of all payments by the investor 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 an
investor's shares or shares acquired through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any contingent deferred
sales charge will be paid to and retained by PSI.
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), at the time of death or initial
determination of 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 1/2; 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 for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted. In addition, the
CDSC will be waived on redemptions of shares held by a Trustee/Director of
either Fund.
An investor must notify PMFS either directly or through Prudential
Securities or Prusec, at the time of redemption, that he or she is entitled to
waiver of the CDSC and provide PMFS with such supporting documentation as it
may deem appropriate. The waiver will be granted subject to confirmation of
the investor's entitlement.
The CDSC will be waived on redemptions of Class C shares from qualified and
non-qualified retirement and deferred compensation plans that participate in
the Transfer Agent's PruArray and SmartPath Programs.
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.
12
<PAGE>
Since the Series track 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 the investor's account (ii)
multiplied by the total number of Class B shares purchased and then held in
the investor's account. Each time any Eligible Shares in the investor's
account convert to Class A shares, all shares or amounts representing Class B
shares then in the investor's account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares. 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, the investor may receive
fewer Class A shares than Class B shares converted.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (ii) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Series will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
EXCHANGE PRIVILEGES
Shareholders of each Series have an exchange privilege with certain other
mutual funds for which PIFM serves as manager or administrator (Prudential
Mutual Funds), including one or more specified money market funds, subject to
the minimum investment requirements of such funds. Class A, Class B, Class C
and Class Z shares of each Series may be exchanged for Class A, Class B, Class
C and Class Z shares, respectively, of another Prudential Mutual Fund on the
basis of their relative net asset value. No sales charge will be imposed at
the time of the exchange. Any CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in the money market fund. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc.
A special exchange privilege is available for shareholders who qualify to
purchase Class A shares at NAV and for shareholders who qualify to purchase
Class Z shares. Under this exchange privilege, amounts representing any Class
B and Class C shares (which are not subject to a CDSC) held in such a
shareholder's account will be automatically exchanged for Class A shares for
shareholders who qualify to purchase Class A shares at NAV on a quarterly
basis, unless the shareholder elects otherwise. Similarly, shareholders who
qualify to purchase Class Z shares, will have their Class B and Class C shares
which are not subject to a CDSC and their Class A shares exchanged for Class Z
shares on a quarterly basis. Eligibility for this exchange privilege will be
calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and (3)
amounts representing Class B or Class C shares held beyond the applicable CDSC
period. Class B and Class C shareholders
13
<PAGE>
must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that they are eligible for this special exchange
privilege.
Participants in any fee-based program for which the Series is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they join the program. Upon leaving the program (whether voluntarily or
not), such Class Z shares (and, to the extent provided for in the program,
Class Z shares acquired through participation in the program) will be
exchanged for Class A shares at net asset value.
An exchange of shares of either Series for shares of another Prudential
Mutual Fund is treated as a redemption of Series shares and purchase of the
other fund's shares for tax purposes. Each Series' exchange privilege is not a
right and may be suspended, modified or terminated at any time on sixty days'
notice.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio expects to distribute and Active Balanced Fund currently
distributes at least annually to its shareholders dividends from all of its
net investment income and distributions of any net capital gains. Shareholders
of Active Balanced Fund receive, and shareholders of the Portfolio will
receive, dividends and other distributions in additional shares of the Series,
unless shareholders elect in writing not less than five business days prior to
the record date to receive dividends and other distributions in cash.
Dividends paid by the Portfolio and Active Balanced 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, on the same day, and will be in the same
amount, except that each class will bear its own distribution expenses,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount
for each class of the Portfolio's or Active Balanced Fund's shares.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED CONVERSION
PDF and Jennison Series Fund have received an opinion of Gardner, Carton &
Douglas to the effect that the proposed Conversion will constitute a tax-free
reorganization within the meaning of section 368(a)(1)(F) of the Internal
Revenue Code. Accordingly, no gain or loss will be recognized to either Series
on the transfer to the Portfolio of all of Active Balanced Fund's assets and
the assumption of all of its liabilities, if any, or to shareholders of Active
Balanced Fund on their receipt of shares of the Portfolio. The tax basis for
such shares to be received by an Active Balanced Fund shareholder will be the
same as the shareholder's tax basis for the shares of Active Balanced Fund to
be constructively surrendered in exchange therefor. In addition, the holding
period of the Portfolio shares to be received by a shareholder pursuant to the
Conversion will include the period during which the shares of Active Balanced
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 Conversion. See "The Proposed Transaction--Federal Income Tax
Considerations" below.
PRINCIPAL RISK FACTORS
Given that the Portfolio has an investment objective and investment policies
that are identical to those of Active Balanced Fund, the risks of investing in
the Portfolio will be the same as the risks associated with investing in
Active Balanced Fund. A complete discussion of the risks attendant to an
investment in the Portfolio, including the risks of investing in foreign
securities, purchasing and selling derivatives and investing in non-investment
grade securities, is provided below under "Information About the Portfolio--
Investment Objective and Policies."
14
<PAGE>
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF CONVERSION AND LIQUIDATION
The terms and conditions under which the Conversion 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) the Portfolio acquiring all of the assets of
Active Balanced Fund in exchange solely for Class A, Class B, Class C and
Class Z shares of the Portfolio and the assumption by the Portfolio of all of
Active Balanced Fund's liabilities, if any, as of the Closing Date, (ii) the
constructive distribution on the Closing Date of such Class A, Class B, Class
C and Class Z shares to the Class A, Class B, Class C and Class Z
shareholders, respectively, of Active Balanced Fund and (iii) the termination
of Active Balanced Fund.
The assets of Active Balanced Fund to be acquired by the Portfolio shall
include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable), claims and rights
of action, rights to register shares under applicable securities laws, books
and records, deferred and prepaid expenses shown as assets on Active Balanced
Fund's books, and other property owned by Active Balanced Fund on the Closing
Date. The Portfolio will assume from Active Balanced Fund all debts,
liabilities, obligations and duties of whatever kind or nature. In exchange
for the transfer by Active Balanced Fund of all those assets to the Portfolio
and the assumption of all those liabilities, the latter will issue and deliver
to Active Balanced Fund full and fractional shares equal in number to the
number of full and fractional shares of Active Balanced Fund then outstanding.
As soon as practicable after the Closing Date, Active Balanced Fund will
distribute pro rata to its shareholders of record, determined as of the close
of business on the Closing Date, the Class A, Class B, Class C and Class Z
shares of the Portfolio received by Active Balanced Fund in exchange for such
shareholders' shares of Active Balanced Fund. Such distribution will be
accomplished by opening accounts on the books of the Portfolio in the names of
the Active Balanced Fund shareholders and by transferring thereto Class A,
Class B, Class C and Class Z shares of the Portfolio previously credited to
the account of Active Balanced Fund on those books. Each shareholder account
shall be credited with the respective pro rata number of the Portfolio Class
A, Class B, Class C and Class Z shares due to the shareholder in whose name
the account is established. Fractional shares of the Portfolio will be rounded
to the third decimal place.
Accordingly, every shareholder of Active Balanced Fund will own Class A,
Class B, Class C and Class Z shares of the Portfolio immediately after the
Conversion that, except for rounding, will be equal in number (and value) to
the total number (and value) of that shareholder's full and fractional Class
A, Class B, Class C and Class Z shares of Active Balanced Fund immediately
prior to the Conversion. Thus, the Conversion will not result in a dilution of
the value of any shareholder account.
Any transfer taxes payable upon issuance of shares of the Portfolio in a
name other than that of the registered holder of the shares constructively
exchanged therefor shall be paid by the person to whom such Portfolio shares
are to be issued, as a condition of such transfer.
The consummation of the Conversion is subject to a number of conditions set
forth in the Plan, some of which may be waived by either Board. The Plan may
be terminated and the Conversion abandoned at any time prior to the Closing
Date, before or after approval by the shareholders of Active Balanced Fund. In
addition, the Plan may be amended in any mutually agreeable manner, except
that no amendment may be made subsequent to the Meeting that would
detrimentally affect the value of the Portfolio shares to be distributed.
15
<PAGE>
REASONS FOR THE CONVERSION
The Board of PDF, including a majority of the Independent Trustees, has
determined that the interests of Active Balanced Fund shareholders will not be
diluted as a result of the Conversion and that the Conversion is in the best
interests of Active Balanced Fund. In addition, the Board of Jennison Series
Fund, including a majority of the Independent Directors, has determined that
the interests of Jennison Series Fund shareholders will not be diluted as a
result of the Conversion and that the Conversion is in the best interests of
Jennison Series Fund. Each Board is comprised of the same individuals.
The reasons for the proposed Conversion are summarized above under
"Synopsis--Reasons for the Proposed Conversion." The Boards of Jennison Series
Fund and PDF based their decisions 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 Series;
(2) the costs of the Conversion, which will be paid for by Active
Balanced Fund;
(3) the tax-free nature of the Conversion to each Series and its
shareholders; and
(4) the potential benefits to the shareholders of Active Balanced Fund.
If the Plan is not approved by the Active Balanced Fund shareholders, the
PDF Board may consider other appropriate action, such as a merger or other
business combination with an investment company other than the Portfolio.
DESCRIPTION OF SECURITIES TO BE ISSUED
Class A, Class B, Class C and Class Z shares of the Portfolio will be issued
to Active Balanced Fund shareholders on the Closing Date. Jennison Series Fund
is authorized to issue 3 billion shares of common stock, $.001 par value per
share, divided into three series, Prudential Jennison Growth Fund, Prudential
Jennison Growth & Income Fund and the Portfolio. The Portfolio is authorized
to issue 250 million shares of Class A, Class B, Class C and Class Z common
stock. Each Class A, Class B, Class C and Class Z share will represent an
equal and proportionate interest in the same assets of the Portfolio. For
further discussion of the Portfolio's shares, see "Synopsis--Structure of the
Series" above.
FEDERAL INCOME TAX CONSIDERATIONS
PDF and Jennison Series Fund have received an opinion from Gardner, Carton &
Douglas, PDF's counsel, substantially to the effect that (1) the Conversion
will constitute a reorganization within the meaning of section 368(a)(1)(F) of
the Internal Revenue Code, and each Series will be a "party to a
reorganization" within the meaning of section 368(b) of the Internal Revenue
Code; (2) an Active Balanced Fund shareholder will recognize no gain or loss
on the constructive exchange of all of his or its shares of Active Balanced
Fund solely for Class A, Class B, Class C and Class Z shares of the Portfolio
pursuant to the Conversion (Internal Revenue Code section 354(a)(1)); (3) no
gain or loss will be recognized to Active Balanced Fund on the transfer of its
assets to the Portfolio in exchange solely for Class A, Class B, Class C and
Class Z shares of the Portfolio and the assumption by the Portfolio of Active
Balanced Fund's liabilities, if any, and the subsequent distribution of those
shares to Active Balanced 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 the Portfolio on the acquisition of such assets in exchange
solely for the Portfolio's Class A, Class B, Class C and Class Z shares and
its assumption of Active Balanced Fund's liabilities, if any (Internal Revenue
Code section 1032(a)); (5) the Portfolio's basis for the assets
16
<PAGE>
to be received pursuant to the Conversion will be the same as the basis
thereof in Active Balanced Fund's hands immediately before the Conversion, and
the Portfolio's holding period for those assets will include Active Balanced
Fund's holding period therefor (Internal Revenue Code sections 362(b) and
1223(2)); (6) an Active Balanced Fund shareholder's basis for the Class A,
Class B, Class C and Class Z shares of the Portfolio to be received by it
pursuant to the Conversion will be the same as its basis for the Class A,
Class B, Class C and Class Z shares of Active Balanced Fund to be
constructively surrendered in exchange therefor (Internal Revenue Code section
358(a)(1)); (7) the holding period of the Class A, Class B, Class C and Class
Z shares of the Portfolio to be received by a shareholder of Active Balanced
Fund pursuant to the Conversion will include the period during which the Class
A, Class B, Class C and Class Z shares of Active Balanced 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
exchange (Internal Revenue Code section 1223(1)); and (8) for purposes of
section 381 of the Internal Revenue Code, the Portfolio will be treated as if
there had been no Conversion.
Shareholders of Active Balanced Fund should consult their tax advisers
regarding the effect, if any, of the Conversion in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Conversion, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Conversion.
CERTAIN COMPARATIVE INFORMATION ABOUT JENNISON SERIES FUND AND PDF
ORGANIZATION. Jennison Series 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. PDF is a Delaware business trust, and the rights
of its shareholders are governed by its Declaration of Trust, its By-Laws and
applicable Delaware law.
CAPITALIZATION. Jennison Series Fund is authorized to issue 3 billion shares
of common stock, par value $.001 per share, divided into three series. The
Portfolio's shares will be divided into four classes, designated Class A,
Class B, Class C and Class Z, each consisting of 250 million authorized
shares. PDF's Declaration of Trust authorizes the Board to issue an unlimited
number of full and fractional shares of beneficial interest, par value $.001
per share. Active Balanced Fund also offers four classes of shares, designated
Class A, Class B, Class C and Class Z.
In addition, the Board of Jennison Series Fund may authorize an increase in
the number of authorized shares and each Board may reclassify unissued shares
to authorize additional classes of shares having terms and rights determined
by the respective Board without shareholder approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Series is
required to hold annual meetings of its shareholders. Each Series 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 Series' outstanding shares entitled to vote. In
addition, each Series 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 was elected by shareholders.
Shareholders of PDF 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 PDF as may be required by applicable law, the Declaration of
Trust, its By-Laws or any registration of PDF with the SEC (or any successor
17
<PAGE>
agency) or any state, or as the Board may consider necessary or desirable.
While PDF's Declaration of Trust does not require a shareholder vote on the
Conversion, PDF's Board has determined that such a vote is 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 the Portfolio 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,
merger, consolidation or transfer of all or substantially all assets, or a
dissolution generally requires the affirmative vote of a majority of the votes
entitled to be cast at a meeting at which a quorum is present (except as
otherwise provided by statute).
The Jennison Series Fund's By-Laws provide that the presence in person or
by proxy of the holders of record of one-third of the shares of the Fund's
common stock issued and outstanding and entitled to vote shall constitute a
quorum at a shareholders' meeting, except as otherwise provided in the
Articles of Incorporation. PDF's Declaration of Trust states that, except when
a larger quorum is required by applicable law, by PDF's By-Laws or by the
Declaration of Trust, forty percent (40%) of the shares entitled to vote at a
shareholder meeting shall constitute a quorum for the transaction of business
at a shareholders' meeting.
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Jennison Series
Fund have no personal liability as such for Jennison Series Fund's acts or
obligations. Under Delaware law, Active Balanced Fund's shareholders similarly
have no personal liability as such for Active Balanced Fund's act or
obligations.
LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under Jennison Series
Fund's Articles of Incorporation and Maryland law, a Director or officer of
the Fund is not liable to Jennison Series 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 PDF's
Declaration of Trust and under Delaware law, no Trustee or officer of PDF
shall be liable to Active Balanced Fund or its shareholders for any action or
failure to act except for his or her own bad faith, willful misfeasance, 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 a Series 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 PDF, its
Declaration of Trust, its By-Laws and Delaware law, and Jennison Series Fund,
its Articles of Incorporation, its By-Laws and Maryland law.
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<PAGE>
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of Active Balanced Fund at
September 30, 1997. The Portfolio will have no assets at the time of
Conversion. Accordingly, the capitalization of Active Balanced Fund is
representative of the pro forma capitalization of the combined Series at that
date.
<TABLE>
<CAPTION>
ACTIVE BALANCED
FUND
---------------
<S> <C>
Net Assets (000)
Class A....................................................... $ 990
Class B....................................................... $ 213
Class C....................................................... $ 5
Class Z....................................................... $158,672
Net Asset Value per share
Class A....................................................... $ 14.41
Class B....................................................... $ 14.34
Class C....................................................... $ 14.34
Class Z....................................................... $ 14.45
Shares Outstanding (000)
Class A....................................................... 69
Class B....................................................... 15
Class C....................................................... 366(a)
Class Z....................................................... 10,981
</TABLE>
- --------
(a) Figure is actual number of shares and not rounded to nearest thousand.
The following table shows the ratio of expenses to average net assets and the
ratio of net investment income to average net assets of Active Balanced Fund
for the fiscal year ended September 30, 1997 (as annualized in the case of
Class A, Class B and Class C). The estimated ratio of expenses to average net
assets and ratio of net investment income to average net assets of shares of
the Portfolio for the fiscal year ending September 30, 1998 are estimated to be
the same as those for the Active Balanced Fund, since no historical financial
information yet exists for shares to be issued by the Portfolio.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
------- ------- ------- -------
<S> <C> <C> <C> <C>
Ratio of expenses to average net assets(a)..... 1.31% 2.06% 2.06% 1.06%
Ratio of net investment income to average net
assets(a)..................................... 2.69% 1.94% 1.94% 2.94%
</TABLE>
- --------
(a) Investment operations for Class A, Class B and Class C commenced on
November 7, 1996.
19
<PAGE>
INFORMATION ABOUT THE PORTFOLIO
SHARES OF THE PORTFOLIO WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON
OR ABOUT JANUARY 23, 1998.
GENERAL
Jennison Series Fund was incorporated in Maryland on August 10, 1995.
Jennison Series Fund is an open-end, diversified, management investment
company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to achieve total returns
approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments. There can be no assurance that
the Portfolio will achieve its investment objective. As with an investment in
any mutual fund, an investment in the Portfolio can decrease in value and you
can lose money.
The Portfolio's investment objective is a fundamental policy and, therefore,
may not be changed without the approval of the holders of a majority of the
Portfolio's outstanding voting securities as defined in the Investment Company
Act. The investment policies and practices of the Portfolio, however, are not
fundamental. Portfolio policies that are not fundamental may be modified by
the Board.
Jennison Associates will use the following ranges as the normal operating
parameters for the securities to be purchased by the Portfolio: (i) 40-75% of
the total assets of the Portfolio will be invested in common stocks, preferred
stocks and other equity-related securities; (ii) 25-60% of the total assets of
the Portfolio will be invested in investment grade fixed income securities;
and (iii) 0-35% of the total assets of the Portfolio will be invested in money
market instruments. Within these parameters, at least 25% of the Portfolio's
total assets will be invested in fixed income senior securities.
The Portfolio's investments will be actively shifted among these asset
classes in order to capitalize on intermediate term (i.e., 12 to 18 months)
valuation opportunities and to maximize the Portfolio's total investment
return. The equity component of the Portfolio 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 the Portfolio will be invested primarily in
fixed income securities rated A or better by Moody's Investors Service, Inc.
(Moody's) or Standard & Poor's Ratings Group (S&P Ratings) (or the equivalent
rating of another nationally recognized statistical rating organization
(NRSRO)) or, if not rated, determined by Jennison Associates to be of
comparable quality to securities so rated. However, the Portfolio 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 Associates to be of comparable quality to securities so
rated. The weighted average maturity of the fixed income component of the
Portfolio will normally be between 5 and 25 years.
Under normal market conditions at least 65% of the value of the Portfolio's
total assets will be invested according to the above allocations. Within these
allocations, the Portfolio's assets may be invested as follows: (i) up to 15%
of the Portfolio's total assets, in common stocks, preferred stocks and other
equity-related securities of foreign issuers; (ii) up to 20% of the
Portfolio's total assets, in investment grade fixed income securities of
foreign issuers; (iii) in mortgage-backed securities; (iv) in custodial
receipts and asset-backed securities; and (v) in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
20
<PAGE>
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement, the Portfolio
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 Portfolio also may: (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and currency forward contracts;
and (iii) purchase and sell put and call options on currencies and on foreign
currency futures contracts, in each case to attempt to reduce risks associated
with currency fluctuations.
The Portfolio reserves the right as a defensive measure to hold temporarily
other types of securities without limit, including high quality commercial
paper, bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign currencies or U.S. dollars), in such
proportions as, in the opinion of Jennison Associates, prevailing market,
economic or political conditions warrant. The Portfolio may also temporarily
hold cash and invest in high quality foreign or domestic money market
instruments pending investment of proceeds from new sales of Portfolio shares
or to meet ordinary daily cash needs. See "Other Investment Practices" below.
EQUITY-RELATED SECURITIES. The Portfolio may invest in equity-related
securities. Equity-related securities include common stocks, preferred stocks,
securities convertible or exchangeable for common stocks or preferred stocks,
equity investments in partnerships, joint ventures and other forms of non-
corporate investments, American Depositary Receipts, and warrants and rights
exercisable for equity securities. See "Convertible Securities, Warrants and
Rights" below.
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS. A convertible security is a
bond, debenture, corporate note, preferred stock or other similar security
that may be converted into or exchanged for a prescribed amount of common
stock or other equity securities of the same or a different issuer within a
particular period of time at a specified price or formula. A warrant or right
entitles the holder to purchase equity securities at a specific price for a
specific period of time. Convertible securities are senior to common stocks in
a corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation dependent upon a market price advance
in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer. See "Risks and Special
Considerations--Risk Factors Relating to Investing in Debt Securities Rated
Below Investment Grade (Junk Bonds)" below.
In recent years, convertible securities have been developed which combine
higher or lower current income with options and other features. The Portfolio
may invest in these types of convertible securities.
21
<PAGE>
U.S. GOVERNMENT SECURITIES. The Portfolio 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.
CORPORATE AND OTHER DEBT OBLIGATIONS. The Portfolio may invest in investment
grade corporate and other debt obligations of domestic and foreign issuers,
including convertible securities and money market instruments. See "Money
Market Instruments" below. Bonds and other debt securities are used by issuers
to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest and must repay the amount borrowed at maturity.
Investment grade debt securities are rated within the four highest quality
grades as determined by Moody's (currently Aaa, Aa, A and Baa for bonds), or
S&P Ratings (currently AAA, AA, A and BBB for bonds), or by another NRSRO, or
in unrated securities which are of equivalent quality in the opinion of
Jennison Associates. Securities rated Baa by Moody's, although considered to
be investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.
NON-INVESTMENT GRADE FIXED INCOME SECURITIES. Up to 5% of the total assets
of the Portfolio may be invested in non-investment grade fixed income
securities, including convertible securities. See "Convertible Securities,
Warrants and Rights" below. Non-investment grade fixed income securities
(those rated below Baa by Moody's or BBB by S&P Ratings or comparably rated by
another NRSRO or unrated securities determined by Jennison Associates to be of
comparable quality) have speculative characteristics (including the
possibility of default or bankruptcy of the issuers of such securities, market
price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative liquidity of the secondary trading market).
Because these securities have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for these securities and adversely affect the value
of these securities and the ability of issuers to repay principal and
interest. See "Risks and Special Considerations--Risk Factors Relating to
Investing in Debt Securities Rated Below Investment Grade (Junk Bonds)" below.
SECURITIES OF FOREIGN ISSUERS. The Portfolio may invest a portion of its
assets in equity securities and fixed income securities of foreign issuers
(denominated in either U.S. or foreign currency). The Portfolio may purchase
American Depositary Receipts (ADRs), which are U.S. dollar-denominated
certificates issued by a U.S. bank or trust company and represent the right to
receive securities of a foreign issuer deposited in a domestic bank or foreign
branch of a U.S. bank and traded on a U.S. exchange or in an over-the-counter
market. Generally, ADRs are in registered form. There are no fees imposed on
the purchase or sale of ADRs when purchased from the issuing bank or trust
company in the initial underwriting, although the issuing bank or trust
company may impose charges for the collection of dividends and the conversion
of ADRs into the underlying securities. Investment in ADRs has certain
advantages over direct investment in the underlying foreign securities since:
(i) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs are
usually subject to comparable auditing, accounting and financial reporting
standards as domestic issuers.
CUSTODIAL RECEIPTS. The Portfolio may acquire custodial receipts or
certificates, such as CATS, TIGRs and FICO Strips, underwritten by securities
dealers or banks, that evidence ownership of future interest payments,
principal payments or both on certain notes or bonds issued by the U.S.
Government, its agencies or
22
<PAGE>
instrumentalities. The underwriters of these certificates or receipts
generally purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the periodic
unmatured coupon payments and the final principal payment on the U.S.
Government security. Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero coupon U.S.
Government securities but are not U.S. Government securities and are neither
insured nor guaranteed by the U.S. Government.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent interests
in pools of mortgages. Principal and interest payments made on the mortgages
in the pools are passed through to the holder of such securities. Payment of
principal and interest on some mortgage-backed securities (but not the market
value of the securities themselves) may be guaranteed by the full faith and
credit of the U.S Government, or guaranteed by agencies or instrumentalities
of the U.S. Government. Mortgage-backed securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance, and letters of
credit, which may be issued by governmental entities, private insurers or the
mortgage poolers.
Mortgage-backed securities include collateralized mortgage obligations
(CMOs), which are obligations fully collateralized by the portfolio of
mortgaged or mortgage-related securities. Payments of principal and interest
on the mortgages are passed through to the holders of the CMO as they are
received, although certain classes of CMOs have priority over others for
receipt of mortgage prepayments. Typically, CMOs are collateralized by
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)
Certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (referred to below as Underlying Assets).
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 accrued 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 Portfolio 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.
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<PAGE>
ASSET-BACKED SECURITIES. The Portfolio may purchase asset-backed securities
that represent either fractional interests or participations in pools of
leases, retail installment loans, or revolving credit receivables held by a
trust or limited purpose finance subsidiary. Such asset-backed securities may
be secured by the underlying assets (such as certificates for automobile
receivables) or may be unsecured (such as credit card receivable securities).
Depending on the structure of the asset-backed security, monthly or quarterly
payments of principal and interest or interest only are passed-through or paid
through to certificate holders. Asset-backed securities may be guaranteed up
to certain amounts by guarantees, insurance, or letters of credit issued by a
financial institution affiliated or unaffiliated with the originator of the
pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage pass-
through securities), which may shorten the securities' weighted average life
and reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, the security interests in the underlying automobiles are often
not transferred when the pool is created, with the resulting possibility that
the collateral could be resold.
Unlike traditional fixed income securities, interest and principal payments
on asset-backed securities are made more frequently, usually monthly, and
principal may be prepaid at any time. As a result, if the Portfolio purchases
such a security at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Portfolio 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
Portfolio 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 Portfolio will not pay any fees for credit support,
although the existence of credit support may increase the price of a security.
MONEY MARKET INVESTMENTS. The Portfolio 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
24
<PAGE>
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 Portfolio may invest in money market instruments without limit
for temporary defensive and cash management purposes. To the extent the
Portfolio otherwise invests in money market instruments, it is subject to the
limitations described above.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE PORTFOLIO ALSO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. THE
PORTFOLIO, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF
THESE STRATEGIES. These strategies currently include the use of derivatives,
such as options, forward currency exchange contracts and futures contracts and
options thereon. The Portfolio'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. New
financial products and risk management techniques continue to be developed and
the Portfolio may use these new investments and techniques to the extent
consistent with its investment objective and policies.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Portfolio 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 Portfolio may invest.
These options are traded on U.S. or foreign securities exchanges or in the
over-the-counter market to hedge its portfolio.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES, SECURITIES IN THE
INDEX OR CURRENCY SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE
PRICE OR STRIKE PRICE). The writer of a call option, in return for the
premium, has the obligation, upon exercise of the option, to deliver,
depending upon the terms of the option contract, the underlying securities or
a specified amount of cash to the purchaser upon receipt of the exercise
price. When the Portfolio writes a call option, the Portfolio 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 Portfolio as the writer of a put option might,
therefore, be obligated to purchase underlying securities or currency for more
than their current market price.
THE PORTFOLIO WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered
if, as long as the Portfolio is obligated under the option, it (i) owns an
offsetting position in the underlying security or currency or (ii) maintains
in a segregated account cash or liquid assets in an amount equal to or greater
than its obligation under the option. Under the first circumstance, the
Portfolio's losses are limited because it owns the underlying security or
currency; under the second circumstance, in the case of a written call option,
the Portfolio's losses are potentially unlimited. There is no limitation on
the amount of options the Portfolio may write.
The Portfolio normally would purchase put options to hedge against a decline
in the market value of securities in its portfolio (protective puts). The
purchase of a put option would entitle the Portfolio, 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
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changes in the value of underlying portfolio securities. The Portfolio
ordinarily would 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 Portfolio would realize a
loss on the purchase of the put option. The Portfolio also may 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 Portfolio will be obligated to sell the security at
less than its market value.
The Portfolio 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 Portfolio or against an increase in the market value of the type of
securities in which the Portfolio may invest. Securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. When purchasing or
selling securities index options, the Portfolio is subject to the risk that
the value of its portfolio securities may not change as much as or more than
the index because the Portfolio's investments generally will not match the
composition of the index.
FUTURES CONTRACTS AND OPTIONS THEREON. THE PORTFOLIO MAY PURCHASE AND SELL
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON WHICH ARE TRADED ON A
COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE CERTAIN RISKS OF ITS
INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH REGULATIONS OF
THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THE PORTFOLIO, AND THUS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
These futures contracts and related options will be on securities, securities
indices, interest rate indices and foreign currencies. A futures contract is
an agreement to purchase or sell an agreed amount of securities or currencies
at a set price for delivery in the future. A stock index futures contract is
an agreement to purchase or sell cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. The
Portfolio may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
The Portfolio 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 Portfolio's existing futures and options on
futures and premiums paid for such related options would exceed 5% of the
liquidation value of the Portfolio's total assets. The Portfolio 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 Portfolio's portfolio.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Portfolio does not
hold the security or currency underlying the futures contract, the Portfolio
will be required to segregate on an ongoing basis with its Custodian cash or
other liquid assets in an amount at least equal to the Portfolio's obligations
with respect to such futures contracts.
THE PORTFOLIO'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
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correlation between movements in the price of a futures contract and the
movement 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
Portfolio. 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 Portfolio's ability to purchase or sell certain
futures contracts or related options on any particular day.
The Portfolio'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.
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
PORTFOLIO WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. The
Portfolio, and thus investors, may lose money through any unsuccessful use of
these strategies. If Jennison Associates' prediction of movements in the
direction of the securities markets or foreign currency or interest rates is
inaccurate, the adverse consequences to the Portfolio may leave the Portfolio
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 Jennison Associates' ability to
predict correctly movements in the direction of interest rates, currency
markets, specific securities being hedged or the movement in stock indices;
(2) imperfect correlation between the price of options and futures 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 Portfolio 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 Portfolio to sell a portfolio
security at a disadvantageous time, due to the need for the Portfolio to
maintain "cover" or to segregate securities in connection with hedging
transactions.
The Portfolio 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 Portfolio will generally purchase OTC options only if the
investment adviser believes that the other party to options will continue to
make a market for such options. However, there can be no assurance that a
liquid secondary market will continue to exist or that the other party will
continue to make a market. Thus, it may not be possible to close an options or
futures transaction. The inability to close options and futures positions also
could have an adverse impact on the Portfolio's ability to effectively hedge
its portfolio. There is also the risk of loss by the Portfolio of margin
deposits or collateral in the event of bankruptcy of a broker with whom the
Portfolio has an open position in an option, a futures contract or related
option.
Forward Foreign Currency Exchange Contracts
A FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INVOLVES AN OBLIGATION TO
PURCHASE OR SELL A SPECIFIC CURRENCY AT A FUTURE DATE, WHICH MAY BE ANY FIXED
NUMBER OF DAYS FROM THE DATE OF THE CONTRACT AGREED UPON BY THE PARTIES, AT A
PRICE SET AT THE TIME OF THE CONTRACT. These contracts are traded in the
interbank market conducted directly between currency traders (typically large
commercial banks) and their customers. A forward contract generally has no
deposit requirements, and no commissions are charged for such trades.
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THE PORTFOLIO'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. When the
Portfolio invests in foreign securities, it may enter into forward contracts
in several circumstances to protect the value of its assets. The Portfolio may
not use forward contracts, options on foreign currencies, futures contracts on
foreign currencies and options on such contracts in order to generate income,
although the use of such contracts may incidentally generate income.
Transaction hedging is the purchase or sale of a forward contract with respect
to specific receivables or payables of the Portfolio generally arising in
connection with the purchase or sale of its portfolio securities and accruals
of interest or dividends receivable and Portfolio 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 Portfolio may enter into, the Portfolio may not position hedge (including
cross hedges) with respect to a particular currency for an amount greater than
the aggregate market value (determined at the time of making any sale of
forward currency) of the securities being hedged.
OTHER INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements,
whereby the seller of a security agrees to repurchase that security from the
Portfolio at a mutually agreed-upon time and price. The period of maturity
usually is 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 Portfolio's money is invested in the security. The Portfolio'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 Portfolio will require
additional collateral. In the event of bankruptcy or default of certain
sellers of repurchase agreements, the Portfolio 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. The
Portfolio may participate in a joint repurchase account managed by PIFM.
SEGREGATED ACCOUNTS. The Portfolio will establish a segregated account with
its Custodian in which it will maintain cash, U.S. Government securities,
equity securities or other liquid, unencumbered assets equal in value to its
obligations in respect of potentially leveraged transactions including forward
contracts, when-issued and delayed-delivery securities, repurchase and reverse
repurchase agreements, forward rolls, dollar rolls, futures contracts, written
options and options on futures contracts (unless otherwise covered). The
assets deposited in the segregated account will be marked-to-market daily.
FORWARD ROLLS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Portfolio
may commit up to 20% of the value of its net assets to investment techniques
such as dollar rolls, forward rolls and reverse repurchase agreements. A
forward roll is a transaction in which the Portfolio 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 Portfolio 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.
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Reverse repurchase agreements involve sales by the Portfolio of portfolio
securities to a financial institution concurrently with an agreement by the
Portfolio to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Portfolio 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 Portfolio with
the proceeds of the initial sale may decline below the price of the securities
the Portfolio 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
Portfolio'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 Portfolio'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 "Borrowing" below.
The Portfolio expects that under normal conditions most of the borrowings of
the Portfolio will consist of such investment techniques rather than bank
borrowings.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed-delivery basis. 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.
LIQUIDITY PUTS. The Portfolio 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."
ILLIQUID SECURITIES. The Portfolio may hold up to 15% of its net assets in
illiquid securities. Illiquid securities include repurchase agreements that
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 and privately placed commercial paper that have
a readily available market are not considered illiquid for purposes of this
limitation. The Portfolio's investment in restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act (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. Jennison Associates will monitor the liquidity of such restricted
securities under the supervision of the Board. Repurchase agreements subject
to demand are deemed to have a maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased OTC options and
the assets used as "cover" for written OTC options are illiquid securities
unless the Portfolio and the counterparty have provided for the Portfolio, at
the Portfolio's election, to unwind the over-the-counter option. The exercise
of such an option ordinarily would involve the payment by the Portfolio of an
amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Portfolio to treat the assets used as "cover"
as "liquid." The Portfolio also will treat non-U.S. Government stripped
mortgage-related interest-only and principal-only securities as illiquid so
long as the staff of the SEC maintains its position that such securities are
illiquid.
SECURITIES LENDING. The Portfolio 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 equivalent
collateral or secures a letter of credit in favor of the Portfolio in an
amount equal to at least 100% of the market
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value of the securities loaned which is maintained in a segregated account
pursuant to applicable regulations. During the time the Portfolio's securities
are on loan, the borrower will pay the Portfolio an amount equivalent to any
dividend or interest paid on such securities and the Portfolio 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. The Portfolio may lend up to 30% of the value of its total
assets.
BORROWING. The Portfolio may borrow from banks or through forward rolls,
dollar rolls or reverse repurchase agreements an amount equal to no more than
20% of the value of its total assets to take advantage of investment
opportunities, for temporary, extraordinary or emergency purposes or for the
clearance of transactions and may pledge up to 20% of the value of its total
assets to secure such borrowings. The Portfolio only will borrow when there is
an expectation that doing so will benefit the Portfolio after taking into
account considerations such as interest income and possible losses upon
liquidation of assets pledged to secure such borrowing. Borrowing by the
Portfolio creates an opportunity for increased net income but at the same time
creates risks, including the fact that leverage may exaggerate the rate of
change in the net asset value of the Portfolio's shares and in the yield on
the Portfolio.
RISKS AND SPECIAL CONSIDERATIONS
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 Portfolio. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possible imposition of exchange controls and
the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect
investment.
Additional costs could be incurred in connection with the Portfolio's
international investment activities. Foreign brokerage commissions are
generally higher than U.S. 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 Portfolio's
securities denominated in that currency. Such changes also will affect the
Portfolio's income and distributions to shareholders. In addition, although
the Portfolio will receive income in such currencies, the Portfolio 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 Portfolio's income
has been accrued and translated into U.S. dollars, the Portfolio could be
required to liquidate portfolio securities to make such distributions,
particularly in instances in which the amount of income the Portfolio is
required to distribute is not immediately reduced by the decline in such
currency. Similarly, if an exchange rate declines between the time
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the Portfolio 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 Portfolio 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 Portfolio; and
protecting the U.S. dollar value of such securities which are held by the
Portfolio.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS). The Portfolio may invest up to 5% of its total assets in
non-investment grade debt securities, including convertible securities. Fixed
income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also
be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield or high risk) securities (commonly referred to as junk bonds) are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Portfolio.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities and, from
time to time, it may be more difficult to value high yield securities than
more highly rated securities. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating the Portfolio's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in
a decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the debt portion of its
portfolio and increasing the exposure of the Portfolio to the risks of high
yield securities.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high
yield bonds. These types of laws could adversely affect the Portfolio's net
asset value and investment practices, the secondary market for high yield
securities, the financial condition of issuers of these securities and the
value of outstanding high yield securities. There is currently no legislation
pending that would adversely impact the market for junk bonds. However, there
can be no assurance that such legislation will not be proposed or enacted in
the future.
BOARD OF DIRECTORS
Jennison Series Fund has a Board that, in addition to overseeing the actions
of the Portfolio's manager, subadvisers and distributor, as set forth below,
decides upon matters of general policy. The Portfolio's manager
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conducts and supervises the daily business operations of the Portfolio. The
Portfolio's subadvisers furnish daily investment advisory services.
MANAGER AND PORTFOLIO MANAGER
Manager
PIFM, GATEWAY CENTER THREE, NEWARK, NEW JERSEY 07102-4077, WILL BE THE
MANAGER OF THE PORTFOLIO AND WILL BE COMPENSATED FOR ITS SERVICES AT AN ANNUAL
RATE OF .65 OF 1% OF THE PORTFOLIO'S AVERAGE DAILY NET ASSETS. It was
established as a New York limited liability company in 1996.
As of October 31, 1997, PIFM served as the manager or administrator to 41
open-end investment companies, constituting all of the Prudential Mutual
Funds, and as manager or administrator to 22 closed-end investment companies,
with aggregate assets of approximately $59.4 billion.
UNDER A PROPOSED MANAGEMENT AGREEMENT WITH JENNISON SERIES FUND, PIFM WILL
MANAGE THE INVESTMENT OPERATIONS OF THE PORTFOLIO AND ALSO WILL ADMINISTER ITS
CORPORATE AFFAIRS.
Subadvisers
PURSUANT TO A PROPOSED SUBADVISORY AGREEMENT WITH PIFM, JENNISON ASSOCIATES
WILL FURNISH INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF
THE PORTFOLIO AND WILL BE COMPENSATED BY PIFM FOR ITS SERVICES AT AN ANNUAL
RATE OF .30 OF 1% OF THE PORTFOLIO'S AVERAGE DAILY NET ASSETS UP TO AND
INCLUDING $300 MILLION AND .25 OF 1% OF THE PORTFOLIO'S AVERAGE DAILY NET
ASSETS IN EXCESS OF $300 MILLION.
Under the Subadvisory Agreement, Jennison Associates, subject to the
supervision of PIFM, is responsible for managing the assets of the Portfolio
in accordance with its investment objective, investment program and policies.
Jennison Associates determines what securities and other instruments are
purchased and sold for the Portfolio and is responsible for obtaining and
evaluating financial data relevant to the Portfolio.
Bradley Goldberg has been the portfolio manager and Peter Reinemann and G.
Todd Silva have been associate portfolio managers of the Active Balanced Fund.
Mr. Goldberg is an Executive Vice President of Jennison Associates, and is
responsible for the day-to-day management of the Active Balanced Fund. Mr.
Goldberg has managed the Active Balanced Fund since its inception in January
1993 and has been employed as portfolio manager at Jennison Associates since
1974. Mr. Goldberg also serves as the portfolio manager of the Prudential
Jennison Growth & Income Fund, a series of the Jennison Series Fund. Mr.
Reinemann, a Senior Vice President and Director, joined Jennison Associates in
1992 as an associate portfolio manager. Prior to that time, he served as a
Vice President at Paribas Asset Management, Inc. Mr. Silva, a Senior Vice
President of Jennison Associates, joined Jennison Associates in June 1996. He
was previously a Vice President and assistant portfolio manager in the Growth
& Income Group at Scudder, Stevens & Clark Inc. and an equity analyst at
Putnam Investments. Mr. Reinemann and Mr. Silva are also Associate Portfolio
Managers of the Prudential Jennison Growth & Income Fund. If the Conversion is
completed, Messrs. Goldberg, Reinemann and Silva will continue to be
responsible for managing the investments of the Portfolio.
Pursuant to a subadvisory agreement with PIFM, PIC will provide investment
advisory services to the Portfolio with respect to (i) the management of
short-term assets, including cash, money market instruments and repurchase
agreements and (ii) the lending of portfolio securities in connection with the
management of the
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Portfolio. For these services, PIFM will reimburse PIC for reasonable costs
and expenses incurred by PIC determined in a manner acceptable to PIMF. PIC
and Jennison Associates are direct, wholly owned subsidiaries of Prudential.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Portfolio. Fee
waivers and expense subsidies may increase the Portfolio's total return.
PORTFOLIO TRANSACTIONS
PSI may act as a broker or futures commission merchant for the Portfolio
provided that the commissions, fees or other remuneration it receives are fair
and reasonable.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, will serve as custodian for the Portfolio's portfolio
securities and cash and, in that capacity, will maintain certain financial and
accounting books and records pursuant to an agreement with the Portfolio. Its
mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
PMFS, Raritan Plaza One, Edison, New Jersey 08837, will serve as Transfer
Agent and Dividend Disbursing Agent and in those capacities will maintain
certain books and records for the Fund. PMFS is a wholly owned subsidiary of
PIFM. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-
5005.
PERFORMANCE
As of the date hereof, the Portfolio has not commenced operations.
JENNISON SERIES FUND SHARES
JENNISON SERIES FUND IS AUTHORIZED TO ISSUE 3 BILLION SHARES OF COMMON
STOCK, PAR VALUE $.001 PER SHARE, WHICH CURRENTLY ARE DIVIDED INTO THREE
PORTFOLIOS OR SERIES, EACH OF WHICH CONSISTS OF 1 BILLION AUTHORIZED SHARES.
THE SHARES OF EACH SERIES ARE DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A,
CLASS B, CLASS C AND CLASS Z COMMON STOCK, EACH CONSISTING OF 250 MILLION
AUTHORIZED SHARES. ONLY SHARES OF THE PORTFOLIO ARE OFFERED HEREBY. Each class
of common stock represents an interest in the same assets of the Portfolio and
is identical in all respects except that (i) each class will be subject to
different sales charges and distribution and/or service fees (with the
exception of Class Z shares, which will not be subject to any sales charges
and distribution and/or service fees), which may affect performance, (ii) each
class will have exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement and will have separate
voting rights on any matter submitted to shareholders in which the interests
of one class differ from the interests of any other class, (iii) each class
will have a different exchange privilege, (iv) only Class B shares will have a
conversion feature and (v) Class Z shares will be offered exclusively for sale
to a limited group of investors. In accordance with Jennison Series Fund's
Articles of Incorporation, 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 Board may determine.
33
<PAGE>
The Board may increase or decrease the number of authorized shares without
the approval of shareholders. Shares of the Portfolio, when issued, are fully
paid, nonassessable, fully transferable and redeemable at the option of the
holder. Shares also are redeemable at the option of the Portfolio under
certain circumstances. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
(with the exception of Class Z shares, which are not subject to any
distribution or service fees) 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 Portfolio is
entitled to its portion of all of the Portfolio's assets after all debt and
expenses of the Portfolio have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders whose shares are not
subject to any distribution and/or service fees. The Portfolio's shares do not
have cumulative voting rights for the election of Directors.
JENNISON SERIES FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS
UNLESS OTHERWISE REQUIRED BY LAW. JENNISON SERIES FUND WILL NOT BE REQUIRED TO
HOLD ANNUAL 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% OF JENNISON SERIES FUND'S OUTSTANDING SHARES FOR
THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT
ANY OTHER BUSINESS.
TAXATION OF THE PORTFOLIO
THE PORTFOLIO INTENDS TO QUALIFY FOR TREATMENT AS A REGULATED INVESTMENT
COMPANY UNDER THE INTERNAL REVENUE CODE. BY DOING SO, THE PORTFOLIO WILL NOT
BE SUBJECT TO FEDERAL INCOME TAX ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options, futures and forward contracts (Section 1256 contracts). At
the end of each year, such investments held by the Portfolio 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 will be treated as long-
term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with
distributions of net short-term capital gain (i.e., the excess of short-term
capital gains over short-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not
reinvested. Any net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses) distributed to shareholders will be
taxable to them as long-term capital gains, 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 individual shareholders is
currently 28% and for securities held more than 18 months is 20%. The maximum
long-term capital gains rate for corporate shareholders currently is the same
as the maximum tax rate for ordinary income.
Jennison Series 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 any class of the Fund's shares for any other class of its shares
constitutes a taxable event for federal income tax purposes. However, such
opinions are not binding on the Internal Revenue Service.
34
<PAGE>
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under U.S. Treasury regulations, the Portfolio will be required to withhold
and remit to the U.S. Treasury 31% of dividends, capital gain income and
redemption proceeds on the accounts of those shareholders who fail to furnish
their correct 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.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source.
DIVIDENDS AND OTHER DISTRIBUTIONS
THE PORTFOLIO EXPECTS TO DISTRIBUTE ANNUALLY TO ITS SHAREHOLDERS ALL OF ITS
NET INVESTMENT INCOME AND ANY NET CAPITAL GAINS. Dividends paid by the
Portfolio with respect to each class of shares, to the extent any dividends
are paid, will be calculated in the same manner, at the same time, on the same
day and will be in the same amount except that each class will bear its own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends
for Class A shares in relation to Class Z shares. Distributions of net capital
gains, if any, will be paid in the same amount per share for each class of
shares.
DIVIDENDS AND OTHER DISTRIBUTIONS WILL BE PAID IN ADDITIONAL PORTFOLIO
SHARES BASED ON THE NET ASSET VALUE OF EACH CLASS ON THE RECORD DATE, OR SUCH
OTHER DATE AS JENNISON SERIES FUND'S BOARD MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND OTHER DISTRIBUTIONS IN CASH. Such
election should be submitted to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. The Portfolio will notify each shareholder after the close of the
Portfolio's taxable year both of the dollar amount and the taxable status of
that year's dividends and other distributions on a per share basis. If you
hold shares through PSI, you should contact your financial adviser to elect to
receive dividends and other distributions in cash.
IF YOU BUY SHARES ON OR PRIOR TO THE RECORD DATE (THE DATE THAT DETERMINES
WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY YOU
INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE PORTFOLIO.
PURCHASES OF SECURITIES BEING OFFERED
SHARES OF THE PORTFOLIO WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON
OR ABOUT JANUARY 23, 1998.
INVESTORS MAY PURCHASE SHARES OF THE PORTFOLIO THROUGH PSI, PRUSEC OR
DIRECTLY FROM JENNISON SERIES FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL
MUTUAL FUND SERVICES LLC, ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW
BRUNSWICK, NEW JERSEY 08906-5020. The offering price per share will be the net
asset value next determined following receipt of an order by PMFS or PSI plus
a sales charge which, at your option, may be imposed either (i) at the time of
purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C
shares). Class Z shares will be offered to a limited group of investors at net
asset value without any sales charge.
35
<PAGE>
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. There is no minimum initial investment requirement
for Class Z shares. The minimum subsequent investment is $100 for all classes,
except for Class Z shares, for which there is no such minimum. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50.
Application forms can be obtained from PMFS, PSI 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 PSI will not receive stock certificates.
The Portfolio reserves the right to reject any purchase order (including an
exchange into the Portfolio) or to suspend or modify the continuous offering
of its shares.
Your dealer is responsible for forwarding payment promptly to the Portfolio.
PSI 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 Portfolio shares may be subject to postage and handling
charges imposed by your dealer.
For an initial purchase of shares of the Portfolio by wire through PSI,
Prusec or directly through the Portfolio's transfer agent, PMFS, you must
first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Jennison Series Fund, Inc. (Prudential Jennison Active
Balanced Fund), specifying on the wire the account number assigned by PMFS and
your name and identifying the sales charge alternative.
If you arrange for receipt by State Street of federal funds prior to the
calculation of net asset value (4:15 P.M., New York time), on a business day,
you may purchase shares of the Portfolio 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 Series
Fund, Inc. (Prudential Jennison Active Balanced Fund), Class A, Class B, Class
C or Class Z shares and your name and individual account number. It is not
necessary to call PMFS to make subsequent purchase orders utilizing federal
funds. The minimum amount which may be invested by wire is $1,000.
REDEMPTIONS
YOU CAN REDEEM SHARES OF THE PORTFOLIO AT ANY TIME FOR CASH AT THE NET ASSET
VALUE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
BY PMFS OR PSI.
IF YOU HOLD SHARES OF THE PORTFOLIO THROUGH PSI, YOU MUST REDEEM YOUR SHARES
THROUGH PSI. PLEASE CONTACT YOUR PSI 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 NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY PMFS IN ORDER FOR THE REDEMPTION REQUEST TO
BE
36
<PAGE>
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO PMFS MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Portfolio in care of Prudential
Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on PMFS'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. PMFS reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan, in the name
of the record holder and at the same address as reflected in PMFS's records, a
signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY PMFS OF THE CERTIFICATE AND/OR WRITTEN REQUEST
EXCEPT AS INDICATED BELOW. If you hold shares through PSI, payment for shares
presented for redemption will be credited to your PSI account, unless you
indicate otherwise. Such payment may be postponed or the right of redemption
suspended at times (a) when the New York Stock Exchange is closed for other
than customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Portfolio of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Portfolio 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 PORTFOLIO OR PMFS 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 PMFS. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR BY
CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Jennison Series Fund determines that it
would be detrimental to the best interests of the remaining shareholders of
the Portfolio to make payment wholly or partly in cash, the Portfolio may pay
the redemption price in whole or in part by a distribution in kind of
securities from the investment portfolio of the Portfolio, 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 in a regular redemption.
If your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. Jennison Series Fund, however, has elected to
be governed by Rule 18f-1 under the Investment Company Act, under which
Jennison Series Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of Jennison Series Fund during
any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Portfolio, the
Board 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
Portfolio will give such shareholders 60
37
<PAGE>
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.
EXCHANGES
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO
PMFS AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
Jennison Series 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 JENNISON SERIES FUND, THE PORTFOLIO
OR THEIR AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH RESULTS
FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE
FOREGOING PROCEDURES. All exchanges will be made on the basis of the relative
net asset value 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 PSI OR THROUGH A DEALER WHICH HAS ENTERED INTO A
SELECTED DEALER AGREEMENT WITH PSI, YOU MUST EXCHANGE YOUR SHARES BY
CONTACTING YOUR FINANCIAL ADVISER.
You also may exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES
BY MAIL BY WRITING TO PMFS AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have
their Class B and Class C shares which are not subject to a CDSC and their
Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility
for this exchange privilege will be calculated on the business day prior to
the date of the exchange. Amounts representing Class B or Class C shares which
are not subject to a CDSC include the following: (1) amounts representing
Class B or Class C shares acquired pursuant to the automatic reinvestment of
dividends and distributions, (2) amounts representing the increase in the net
asset value above the total amount of payments for the purchase of Class B or
Class C shares and (3) amounts representing Class B or Class C shares held
beyond the applicable CDSC period. Class B and Class C shareholders must
notify the Transfer Agent either directly or through Prudential Securities or
Prusec that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Portfolio is an
available option will have their Class A shares, if any, exchanged for Class Z
shares when they join the program. Upon leaving the program (whether
voluntarily or not), such Class Z shares (and, to the extent provided for in
the program, Class Z shares acquired through participation in the program)
will be exchanged for Class A shares at net asset value.
38
<PAGE>
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. Jennison Series Fund and the other Prudential Mutual Funds
are not intended to serve as vehicles for frequent trading in response to
short-term fluctuations in the market. Due to the disruptive effect that
market timing investment strategies and excessive trading can have on
efficient portfolio management, each Prudential Mutual Fund and Jennison
Series Fund reserve the right to refuse purchase orders and exchanges by any
person, group or commonly controlled accounts, if, in PIFM's sole judgment,
such person, group or accounts were following a market timing strategy or were
otherwise engaging in excessive trading ("Market Timers").
To implement this authority to protect Jennison Series Fund and its
shareholders from excessive trading, Jennison Series Fund will reject all
exchanges and purchases from a Market Timer unless the Market Timer has
entered into a written agreement with Jennison Series Fund or its affiliates
pursuant to which the Market Timer has agreed to abide by certain procedures,
which include a daily dollar limit on trading. Jennison Series Fund may notify
the Market Timer of rejection of an exchange or purchase order subsequent to
the day on which the order was placed.
NET ASSET VALUE
THE PORTFOLIO'S NET ASSET VALUE PER SHARE WILL BE DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS, AND DIVIDING THE REMAINDER BY
THE NUMBER OF OUTSTANDING SHARES. NET ASSET VALUE WILL BE CALCULATED
SEPARATELY FOR EACH CLASS. For valuation purposes, quotations of foreign
securities in a foreign currency will be converted to U.S. dollar equivalents.
THE BOARD OF JENNISON SERIES FUND HAS FIXED THE SPECIFIC TIME OF DAY FOR THE
COMPUTATION OF THE PORTFOLIO'S NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK
TIME.
Portfolio securities will be valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Portfolio's Board.
The Portfolio will compute its net asset value 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 Jennison Series Fund
or days on which changes in the value of the Portfolio's portfolio securities
do not materially affect the net asset value.
39
<PAGE>
INFORMATION ABOUT ACTIVE BALANCED FUND
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The following financial highlights for Class A, Class B, Class C and Class Z
shares for the periods ended September 30, 1997, have been audited by Price
Waterhouse LLP, independent accountants, whose report thereon was unqualified.
The financial highlights for the year ended September 30, 1996 and preceding
periods have been audited by Deloitte & Touche LLP, independent auditors, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and the notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class A, Class B, Class C and Class Z share of beneficial interest,
respectively, outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The highlights presented below
also are representative of the combined Series because, at the time of the
Conversion, the combined Series will consist only of the assets of the Active
Balanced Fund.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------- ------------- -------------
NOVEMBER 7, NOVEMBER 7, NOVEMBER 7,
1996(E) 1996(E) 1996(E)
THROUGH THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $13.40 $13.40 $13.40
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... .21(f) .19(f) .13(f)
Net realized and
unrealized gain (loss)
on investment
transactions............ 1.97 1.92 1.98
------ ------ ------
Total from investment
operations............. 2.18 2.11 2.11
------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income....... (.39) (.39) (.39)
Distributions from net
realized gains.......... (.78) (.78) (.78)
------ ------ ------
Total distributions..... (1.17) (1.17) (1.17)
------ ------ ------
Net asset value, end of
period.................. $14.41 $14.34 $14.34
====== ====== ======
TOTAL RETURN(D):......... 17.48% 16.91% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 990 $ 213 $ 5
Average net assets (000). $ 100 $ 71 $ 1
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.31%(c) 2.06%(c) 2.06%(c)
Expenses, excluding
distribution fees...... 1.06%(c) 1.06%(c) 1.06%(c)
Net investment income... 2.69%(c) 1.94%(c) 1.94%(c)
Portfolio turnover rate.. 50% 50% 50%
Average commission rate
paid per share.......... $.0625 $.0625 $.0625
<CAPTION>
CLASS Z
--------------------------------------------------------------------
JANUARY 4,
1993(A)
YEAR ENDED SEPTEMBER 30, THROUGH
-------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 13.01 $ 12.46 $ 10.92 $ 11.05 $ 10.00
------------ ------------ ------------ ----------- -----------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... .39(f) .29 (b) .33 (b) .24 (b) .21 (b)
Net realized and
unrealized gain (loss)
on investment
transactions............ 2.22 .81 1.54 (.12) .84
------------ ------------ ------------ ----------- -----------------
Total from investment
operations............. 2.61 1.10 1.87 .12 1.05
------------ ------------ ------------ ----------- -----------------
LESS DISTRIBUTIONS:
Dividends from net
investment income....... (.39) (.37) (.29) (.14) --
Distributions from net
realized gains.......... (.78) (.18) (.04) (.11) --
------------ ------------ ------------ ----------- -----------------
Total distributions..... (1.17) (.55) (.33) (.25) --
------------ ------------ ------------ ----------- -----------------
Net asset value, end of
period.................. $ 14.45 $ 13.01 $ 12.46 $ 10.92 $ 11.05
============ ============ ============ =========== =================
TOTAL RETURN(D):......... 21.34% 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $158,672 $153,588 $133,352 $81,176 $38,786
Average net assets (000). $154,199 $142,026 $104,821 $58,992 $12,815
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.06%(c) 1.00%(b) 1.00%(b) 1.00%(b) 1.00%(b)(c)
Expenses, excluding
distribution fees...... N/A N/A N/A N/A N/A
Net investment income... 2.94%(c) 3.09%(b) 3.53%(b) 3.06%(b) 2.68%(b)(c)
Portfolio turnover rate.. 50% 51% 30% 40% 47%
Average commission rate
paid per share.......... $ .0625 $ .0654 N/A N/A N/A
</TABLE>
- -------
(a)Commencement of investment operations.
(b)Net of expense subsidy.
(c)Annualized.
(d) 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 return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies, where
applicable.
(e)Commencement of offering of Class A, B and C shares.
(f)Calculated based upon weighted average shares outstanding during the year.
40
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of Active Balanced Fund, see "General Information" and "Fund Highlights" in the
Active Balanced Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Active Balanced Fund's investment objective and policies
and of risk factors associated with an investment in Active Balanced Fund, see
"How the Fund Invests" in the Active Balanced Fund Prospectus.
BOARD OF TRUSTEES
For a discussion of the responsibilities of PDF's Board, see "How the Fund is
Managed" in the Active Balanced Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Active Balanced Fund's Manager and subadvisers and Active
Balanced Fund's portfolio manager, see "How the Fund is Managed" in the Active
Balanced Fund Prospectus.
PORTFOLIO TRANSACTIONS
For a discussion of Active Balanced Fund's policy with respect to brokerage,
see "How the Fund is Managed--Portfolio Transactions" in the Active Balanced
Fund Prospectus.
PERFORMANCE
For a discussion of Active Balanced Fund's performance during the fiscal year
ended September 30, 1997, see the annual report enclosed herewith.
ACTIVE BALANCED FUND SHARES
For a discussion of Active Balanced Fund shares, including voting 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 Active
Balanced Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of Active Balanced Fund shares is
determined, see "How the Fund Values its Shares" in the Active Balanced Fund
Prospectus.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of Active Balanced Fund's policy with respect to dividends
and other distributions and the tax consequences of an investment in its
shares, see "Taxes, Dividends and Distributions" in the Active Balanced Fund
Prospectus.
41
<PAGE>
MISCELLANEOUS
ADDITIONAL INFORMATION
Both PDF and Jennison Series Fund are subject to the informational
requirements of the Securities Exchange Act of 1934 and in accordance
therewith file reports and other information with the SEC. Reports and other
information filed by PDF and Jennison Series 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
The validity of shares of the Portfolio to be issued pursuant to the Plan
will be passed upon by Piper & Marbury, L.L.P., Baltimore, Maryland, special
counsel to the Jennison Series Fund.
EXPERTS
The audited financial statements of Active Balanced Fund, incorporated by
reference herein or in the Statement of Additional Information, have been
audited by Price Waterhouse LLP, independent accountants, for the year ended
September 30, 1997 or Deloitte & Touche LLP, independent auditors, for each of
the four periods in the periods ended September 30, 1996. The financial
statements audited by Price Waterhouse LLP or Deloitte & Touche LLP have been
incorporated by reference herein or in the Statement of Additional Information
in reliance on their respective reports given as experts in auditing and
accounting.
VOTING INFORMATION
Forty percent of the shares of Active Balanced Fund outstanding on November
7, 1997, 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 all
shares that they are entitled to vote for the proposed adjournment, 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 instructed 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 PDF or by attendance at the Meeting. If a Proxy that is
properly executed and returned is 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 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
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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.
Approval of the Plan requires the vote of a "majority of the outstanding
voting securities" of Active Balanced Fund, as defined in the Investment
Company Act, which 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.
The close of business on November 7, 1997, 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, Active Balanced Fund had 13,361,618 shares
outstanding and entitled to vote. Each outstanding full share of Active
Balanced Fund will be entitled to one vote at the Meeting, and each
outstanding fractional share of Active Balanced Fund will be entitled to a
proportionate fractional part of one vote. As of November 7, 1997, the
Trustees and officers of PDF, as a group, owned less than 1% of the
outstanding shares of Active Balanced Fund and the Directors and officers of
Jennison Series Fund, as a group, owned less than 1% of the outstanding shares
of the Portfolio. As of November 7, 1997, the following shareholders owned
beneficially or of record 5% or more of Active Balanced Fund's outstanding
shares: (i) Thrifty Payless 401(k) Plan and Profit Sharing Plan and Rite Aid
Employee Investment Opportunity Plan, Rite Aid Corporation, 30 Hunter Lane,
Camp Hill, PA 17011 which held 3,466,141 Class Z shares (26.1%) and 1,293,045
Class Z shares (9.8%), respectively and (ii) BMG Entertainment 401(k) Savings
Plan, Bertelsmann, Inc., 1540 Broadway, 24th Floor, New York, NY 10036 which
held 753,787 Class Z shares (5.7%). Prudential intends to vote any shares for
which it has direct voting authority FOR the proposed Conversion.
The expenses of the Conversion and the solicitation of proxies will be borne
by Active Balanced Fund and will include reimbursement of brokerage firms and
others for expenses in forwarding proxy solicitation material to the
shareholders of the Active Balanced 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 also will be borne
by Active Balanced Fund.
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
Active Balanced 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 Active Balanced Fund, taking into
account all relevant circumstances.
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SHAREHOLDERS' PROPOSALS
Any Active Balanced Fund shareholder proposal intended to be presented at
any subsequent meeting of the shareholders of Active Balanced Fund must be
received by PDF a reasonable time before the Board's solicitation relating to
such meeting is made in order to be included in Active Balanced 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 Active Balanced Fund.
It is the present intent of the Boards of PDF and Jennison Series Fund not
to hold annual meetings of shareholders unless the election of
Directors/Trustees is required under the Investment Company Act nor hold
special meetings of shareholders unless required by the Investment Company Act
or state law.
S. Jane Rose
Secretary
Dated: November 24, 1997
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APPENDIX A
FORM OF AGREEMENT AND PLAN OF CONVERSION AND LIQUIDATION
This AGREEMENT AND PLAN OF CONVERSION AND LIQUIDATION (Agreement) is made as
of this 15th day of October, 1997, between Prudential Jennison Series Fund,
Inc., a Maryland corporation (Jennison Series Fund), on behalf of Prudential
Jennison Active Balanced Fund, a segregated portfolio of assets (series)
thereof (Jennison Active Balanced Fund), and Prudential Dryden Fund, a
Delaware business trust (PDF), on behalf of its Prudential Active Balanced
Fund series (Prudential Active Balanced Fund). (Jennison Active Balanced Fund
and Prudential Active Balanced Fund are sometimes referred to herein
individually as a Fund and collectively as the Funds, and Jennison Series Fund
and PDF are sometimes referred to herein individually as an Investment Company
and collectively as the Investment Companies. All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by
either Fund are made and shall be taken or undertaken by Jennison Series Fund
on behalf of Jennison Active Balanced Fund and by PDF on behalf of Prudential
Active Balanced Fund.)
Prudential Active Balanced Fund intends to change its identity, form, and
place of organization--by converting from a series of a Delaware business
trust to a series of a Maryland corporation--through a reorganization within
the meaning of section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended (Code). Prudential Active Balanced Fund desires to accomplish such
conversion by transferring all of its assets to Jennison Active Balanced Fund
(which has been established solely for the purpose of acquiring such assets
and continuing Prudential Active Balanced Fund's business) in exchange solely
for voting shares of Class A, Class B, Class C and Class Z common stock in
Jennison Active Balanced Fund (Jennison Active Balanced Fund Shares) and
Jennison Active Balanced Fund's assumption of Prudential Active Balanced
Fund's liabilities, followed by the constructive distribution of the Jennison
Active Balanced Fund Shares pro rata to the holders of Class A, Class B, Class
C and Class Z shares of beneficial interest in Prudential Active Balanced Fund
(Prudential Active Balanced Fund Shares) in exchange therefor, all on the
terms and conditions set forth in this Agreement (which is intended to be, and
is adopted as, a "plan of reorganization" for federal income tax purposes)
(all such transactions being herein referred to as the Reorganization).
In consideration of the mutual promises herein contained, the parties agree
as follows:
1.PLAN OF CONVERSION AND LIQUIDATION.
1.1. Prudential Active Balanced Fund agrees to assign, sell, convey,
transfer, and deliver all of its assets described in paragraph 1.2 (Assets) to
Jennison Active Balanced Fund. Jennison Active Balanced Fund agrees in
exchange therefor (a) to issue and deliver to Prudential Active Balanced Fund
full and fractional Jennison Active Balanced Fund Shares, equal in number to
the number of full and fractional Prudential Active Balanced Fund Shares then
outstanding, and (b) to assume all of Prudential Active Balanced Fund's
liabilities described in paragraph 1.3 (Liabilities). Such transactions shall
take place at the Closing (as defined in paragraph 2.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Prudential Active Balanced Fund's books, and other property
owned by Prudential Active Balanced Fund at the Effective Time (as defined in
paragraph 2.1).
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1.3. The Liabilities shall include all of Prudential Active Balanced Fund's
liabilities, debts, obligations, and duties of whatever kind or nature,
whether absolute, accrued, contingent, or otherwise, whether or not
determinable at the Effective Time, and whether or not specifically referred
to herein.
1.4. At the Effective Time (or as soon thereafter as is reasonably
practicable), (a) the Jennison Active Balanced Fund Shares issued pursuant to
paragraph 4.7 shall be redeemed by Jennison Active Balanced Fund at net asset
value and (b) Prudential Active Balanced Fund shall constructively distribute
the Jennison Active Balanced Fund Shares received by it pursuant to paragraph
1.1 to Prudential Active Balanced Fund's shareholders of record, determined as
of the Effective Time (collectively Shareholders and each individually a
Shareholder), in exchange for their Prudential Active Balanced Fund Shares.
Such distribution shall be accomplished by Jennison Series Fund's transfer
agent (Transfer Agent) opening an account on Jennison Active Balanced Fund's
share transfer books in each Shareholder's name and crediting thereto the
respective pro rata number of full and fractional (rounded to the third
decimal place) Jennison Active Balanced Fund Shares due that Shareholder. All
outstanding Prudential Active Balanced Fund Shares shall simultaneously be
canceled on Prudential Active Balanced Fund's share transfer books. Jennison
Active Balanced Fund shall not issue certificates representing the Jennison
Active Balanced Fund Shares in connection with the Reorganization.
1.5. As soon as reasonably practicable after distribution of the Jennison
Active Balanced Fund Shares pursuant to paragraph 1.4, Prudential Active
Balanced Fund shall be terminated as a series of PDF and any further actions
shall be taken in connection therewith as required by applicable law.
1.6. Any transfer taxes payable upon issuance of Jennison Active Balanced
Fund Shares in a name other than that of the registered holder on Prudential
Active Balanced Fund's books of the Prudential Active Balanced Fund Shares
constructively exchanged therefor shall be paid by the person to whom such
Jennison Active Balanced Fund Shares are to be issued, as a condition of such
transfer.
2. CLOSING.
2.1. The Reorganization, together with related acts necessary to consummate
the same (Closing), shall occur at the Funds' principal office on January 23,
1998, or at such other place and/or on such other date as to which the parties
may agree. All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the date thereof or at such
other time as the parties may agree (Effective Time).
2.2. PDF shall deliver to Jennison Series Fund at the Closing a schedule of
the Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax basis and holding period by
lot. Prudential Active Balanced Fund's custodian shall deliver at the Closing
a certificate of an authorized officer stating that (a) the Assets held by the
custodian will be transferred to Jennison Active Balanced Fund at the
Effective Time and (b) all necessary taxes in conjunction with the delivery of
the Assets, including all applicable federal and state stock transfer stamps,
if any, have been paid or provision for payment has been made.
2.3. PDF shall deliver to Jennison Series Fund at the Closing a list of the
Shareholders' names and addresses and the number of outstanding Prudential
Active Balanced Fund Shares owned by each Shareholder, all as of the Effective
Time, certified by PDF's Transfer Agent, Prudential Mutual Fund Services LLC
(Transfer Agent). The Transfer Agent shall deliver at the Closing a
certificate as to the opening on Jennison Active Balanced Fund's share
transfer books of accounts in the Shareholders' names. Prudential Active
Balanced Fund shall issue and deliver a confirmation to PDF evidencing the
Jennison Active Balanced Fund Shares to be credited to Prudential Active
Balanced Fund at the Effective Time or provide evidence satisfactory to PDF
that
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such shares have been credited to Prudential Active Balanced Fund's account on
Jennison Active Balanced Fund's books. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts, or other documents as the other party or its counsel
may reasonably request.
2.4. 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 Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
3.REPRESENTATIONS AND WARRANTIES.
3.1. Prudential Active Balanced Fund represents and warrants as follows:
3.1.1. PDF is a business trust duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and its Certificate
of Trust is on file with the Delaware Secretary of State;
3.1.2. PDF is duly registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (1940 Act),
and such registration is in full force and effect;
3.1.3. Prudential Active Balanced Fund is a duly established and
designated series of PDF;
3.1.4. At the Closing, Prudential Active Balanced Fund will have good and
marketable title to the Assets and full right, power, and authority to
sell, assign, transfer, and deliver the Assets free of any liens or other
encumbrances;
3.1.5. Jennison Active Balanced Fund Shares are not being acquired for
the purpose of making any distribution thereof, other than in accordance
with the terms hereof;
3.1.6. Prudential Active Balanced Fund is a "fund" as defined in section
851(h)(2) of the Code; it qualified for treatment as a regulated investment
company under Subchapter M of the Code (RIC) 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, for
each past calendar year since it commenced operations, it 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;
3.1.7. There is no plan or intention of Shareholders who own 5% or more
of the Prudential Active Balanced Fund Shares--and, to the best of PDF's
management's knowledge, there is no plan or intention of the remaining
Shareholders--to redeem or otherwise dispose of any portion of the Jennison
Active Balanced Fund Shares to be received by them in the Reorganization;
3.1.8. The Liabilities were incurred by Prudential Active Balanced Fund
in the ordinary course of its business;
3.1.9. Prudential Active Balanced Fund 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) of the Code;
3.1.10. Not more than 25% of the value of Prudential Active Balanced
Fund'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;
3.1.11. Prudential Active Balanced Fund will be terminated as a series of
PDF as soon as reasonably practicable after the Reorganization, but in all
events within twelve months after the Effective Time;
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3.1.12. As of the Effective Time, Prudential Active Balanced Fund will
not have outstanding any warrants, options, convertible securities, or any
other type of rights pursuant to which any person could acquire Prudential
Active Balanced Fund Shares, except for the Class B Shares that have the
conversion feature described in Prudential Active Balanced Fund's current
prospectus.
3.1.13. PDF 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 Prudential Active Balanced
Fund is a party or by which Prudential Active Balanced Fund is bound;
3.1.14. All material contracts or other commitments of Prudential Active
Balanced Fund, or any of its properties or assets, except this Agreement
and investment contracts will be terminated, or provision for discharge of
any liabilities of Prudential Active Balanced Fund thereunder will be made
at or prior to the Effective Time without either Fund's incurring any
liability or penalty with respect thereto;
3.1.15. 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 Prudential Active Balanced
Fund or any of its properties or assets, except as previously disclosed in
writing to Jennison Series Fund. PDF knows of no facts that might form the
basis for the institution of such litigation, proceedings, or
investigation, and Prudential Active Balanced 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;
3.1.16. The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Prudential Active Balanced Fund at September
30, 1996, and for the year then ended (copies of which have been furnished
to Jennison Series 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 Prudential Active Balanced Fund
as of and for the period ended on such date, and there are no material
known liabilities of Prudential Active Balanced Fund (contingent or
otherwise) not disclosed therein;
3.1.17. Since September 30, 1996, there has not been any material adverse
change in Prudential Active Balanced Fund's financial condition, assets,
liabilities, or business other than changes occurring in the ordinary
course of business, or any incurrence by Prudential Active Balanced Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by Jennison
Series Fund. For the purposes of this paragraph 3.1.17, a decline in net
asset value or a decrease in the number of shares outstanding shall not
constitute a material adverse change;
3.1.18. At the date hereof and at the Effective Time, all federal and
other tax returns and reports of Prudential Active Balanced 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 PDF'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;
3.1.19. All issued and outstanding shares of Prudential Active Balanced
Fund are, and at the Effective Time will be, duly and validly authorized,
issued, and outstanding, fully paid and non-assessable. All issued
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and outstanding shares of Prudential Active Balanced 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 Series Fund in
accordance with the provisions of paragraph 2.3. Prudential Active Balanced
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 Class B Shares that
have the conversion feature described in Prudential Active Balanced Fund's
current prospectus.
3.1.20. At the Effective Time, Prudential Active Balanced Fund will have
good and marketable title to its assets to be transferred to Jennison
Active Balanced 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 Active Balanced Fund will acquire
good and marketable title thereto;
3.1.21. The execution, delivery, and performance of this Agreement have
been duly authorized by the Board of Trustees of PDF and by all necessary
corporate action, other than shareholder approval, on the part of
Prudential Active Balanced Fund, and this Agreement constitutes a valid and
binding obligation of PDF, 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 Effective
Time, the performance of this Agreement shall have been duly authorized by
all necessary action by Prudential Active Balanced Fund's shareholders;
3.1.22. The information furnished and to be furnished by PDF 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
3.1.23. On the effective date of the registration statement filed with
the Securities and Exchange Commission (SEC) by Jennison Series Fund on
Form N-14 relating to the shares of Jennison Active Balanced Fund issuable
hereunder, and any supplement or amendment thereto (Registration
Statement), at the time of the meeting of the Shareholders of Prudential
Active Balanced Fund, and at the Effective Time, the Proxy Statement of PDF
and the Prospectus of Jennison Active Balanced Fund 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 1940 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 3.1.23 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by Jennison Series
Fund for use therein.
3.2. Jennison Active Balanced Fund represents and warrants as follows:
3.2.1. Jennison Series Fund is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Maryland, and
its Articles of Incorporation are on file with the Department of
Assessments and Taxation of the State of Maryland;
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3.2.2. Jennison Series Fund is duly registered as an open-end management
investment company under the 1940 Act, and such registration is in full
force and effect;
3.2.3. Before the Effective Time, Jennison Active Balanced Fund will be a
duly established and designated series of Jennison Series Fund;
3.2.4. Jennison Active Balanced Fund has not commenced operations, nor
will it commence operations until after the Closing;
3.2.5. Prior to the Effective Time, there will be no issued and
outstanding Jennison Active Balanced Fund Shares or any other securities
issued by Jennison Active Balanced Fund, except as provided in paragraph
4.7;
3.2.6. No consideration other than Jennison Active Balanced Fund Shares
(and Jennison Active Balanced Fund's assumption of the Liabilities) will be
issued in exchange for the Assets in the Reorganization;
3.2.7. The Jennison Active Balanced Fund Shares to be issued and
delivered to Prudential Active Balanced Fund hereunder will, at the
Effective Time, have been duly authorized and, when issued and delivered as
provided herein, will be duly and validly issued and outstanding shares of
Jennison Active Balanced Fund, fully paid and non-assessable;
3.2.8. Jennison Active Balanced Fund will be a "fund" as defined in
section 851(h)(2) of the Code and will meet all the requirements to qualify
for treatment as a RIC for its taxable year in which the Reorganization
occurs;
3.2.9. Jennison Active Balanced Fund has no plan or intention to issue
additional Jennison Active Balanced Fund Shares following the
Reorganization except for shares issued in the ordinary course of its
business as a series of an open-end investment company; nor does Jennison
Active Balanced Fund have any plan or intention to redeem or otherwise re-
acquire any Jennison Active Balanced Fund Shares issued to the Shareholders
pursuant to the Reorganization, other than through redemptions arising in
the ordinary course of such business;
3.2.10. Jennison Active Balanced Fund (a) will actively continue
Prudential Active Balanced Fund's business in substantially the same manner
that Prudential Active Balanced Fund conducted that business immediately
before the Reorganization, (b) has no plan or intention to sell or
otherwise dispose of any of the Assets, except for dispositions made in the
ordinary course of that business and dispositions necessary to maintain its
status as a RIC, and (c) expects to retain substantially all the Assets in
the same form as it receives them in the Reorganization, unless and until
subsequent investment circumstances suggest the desirability of change or
it becomes necessary to make dispositions thereof to maintain such status;
3.2.11. There is no plan or intention for Jennison Active Balanced Fund
to be dissolved or merged into another corporation or business trust or
"fund" thereof (within the meaning of section 851(h)(2) of the Code)
following the Reorganization;
3.2.12. Immediately after the Reorganization, (a) not more than 25% of
the value of Jennison Active Balanced Fund's 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;
3.2.13. Jennison Series 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 Active Balanced Fund is a party or by which Jennison Active
Balanced Fund is bound;
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3.2.14. The execution, delivery, and performance of this Agreement have
been duly authorized by the Board of Directors of Jennison Series Fund and
by all necessary corporate action on the part of Jennison Active Balanced
Fund, and this Agreement constitutes a valid and binding obligation of
Jennison Series 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;
3.2.15. The Shares of Jennison Active Balanced Fund to be issued and
delivered to Prudential Active Balanced Fund pursuant to this Agreement
will, at the Effective Time, 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 Active Balanced Fund, fully paid and
non-assessable;
3.2.16. The information furnished and to be furnished by Jennison Series
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
3.2.17. On the effective date of the Registration Statement, at the time
of the meeting of the shareholders of Prudential Active Balanced Fund, and
at the Effective Time, the Proxy Statement (a) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act, and the 1940
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 3.2.17 shall not apply to statements in or omissions from the
Proxy Statement made in reliance upon and in conformity with information
furnished by PDF for use therein.
3.3. Each Fund represents and warrants as follows:
3.3.1. The fair market value of the Jennison Active Balanced Fund Shares,
when received by the Shareholders, will be approximately equal to the fair
market value of their Prudential Active Balanced Fund Shares constructively
surrendered in exchange therefor;
3.3.2. Immediately following consummation of the Reorganization, the
Shareholders will own all the Jennison Active Balanced Fund Shares and will
own such Shares solely by reason of their ownership of Prudential Active
Balanced Fund Shares immediately prior to the Reorganization;
3.3.3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
3.3.4. Immediately following consummation of the Reorganization, Jennison
Active Balanced Fund will hold the same assets--except for assets used to
pay expenses incurred in connection with the Reorganization (which excepted
assets, together with the amount of all redemptions and distributions
(other than regular, normal dividends) made by Prudential Active Balanced
Fund immediately preceding the Reorganization, will, in the aggregate,
constitute less than 1% of its net assets)--and be subject to the same
liabilities that Prudential Active Balanced Fund held or was subject to
immediately prior thereto; and
3.3.5. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount.
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<PAGE>
4.CONDITIONS PRECEDENT.
Each Fund's obligations hereunder shall be subject to (a) performance by the
other party of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other party
contained herein being true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same force and effect
as if made on and as of the Effective Time, and (c) the further conditions
that, at or before the Effective Time:
4.1. All necessary filings shall have been made with the SEC and state
securities authorities, and all consents, orders, and permits of federal,
state, and local regulatory authorities (including those of the SEC and state
securities 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;
4.2. One or more post-effective amendments to Jennison Series Fund
registration statement on Form N-1A under the Securities Act of 1933, as
amended, and the 1940 Act (Registration Statement) shall have been filed with
the SEC containing such amendments to the Registration Statement as are
determined by the trustees/directors of each Investment Company to be
necessary and appropriate as a result of this Agreement and such post-
effective amendment(s) to the Registration Statement shall have become
effective;
4.3. Each party shall have received an opinion from Gardner, Carton &
Douglas, counsel to PDF and to Jennison Series Fund, as to the federal income
tax consequences mentioned below. 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 2.4. Such opinion shall be substantially to the effect that, based
on the facts and assumptions stated therein, for federal income tax purposes:
4.3.1. The Reorganization will constitute a reorganization within the
meaning of section 368(a)(1)(F) of the Code, and each Fund will be "a party
to a reorganization" within the meaning of section 368(b) of the Code;
4.3.2. No gain or loss will be recognized to Prudential Active Balanced
Fund on the transfer of the Assets to Jennison Active Balanced Fund in
exchange solely for Jennison Active Balanced Fund Shares and Jennison
Active Balanced Fund's assumption of the Liabilities or on the subsequent
distribution of those Shares to the Shareholders, in constructive exchange
for their Prudential Active Balanced Fund Shares, in liquidation of
Prudential Active Balanced Fund;
4.3.3. No gain or loss will be recognized to Jennison Active Balanced
Fund on its receipt of the Assets in exchange for Jennison Active Balanced
Fund Shares and its assumption of the Liabilities;
4.3.4. Jennison Active Balanced Fund's basis for the Assets will be the
same as the basis thereof in Prudential Active Balanced Fund's hands
immediately before the Reorganization, and Jennison Active Balanced Fund's
holding period for the Assets will include Prudential Active Balanced
Fund's holding period therefor;
4.3.5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Prudential Active Balanced Fund Shares solely for
Jennison Active Balanced Fund Shares pursuant to the Reorganization;
A-8
<PAGE>
4.3.6. A Shareholder's basis for the Jennison Active Balanced Fund Shares
to be received by it in the Reorganization will be the same as the basis
for its Prudential Active Balanced Fund Shares to be constructively
surrendered in exchange for those Jennison Active Balanced Fund Shares, and
its holding period for those Jennison Active Balanced Fund Shares will
include its holding period for those Prudential Active Balanced Fund
Shares, provided they are held as capital assets by the Shareholder at the
Effective Time; and
4.3.7. For purposes of section 381 of the Code, Jennison Active Balanced
Fund will be treated as if there had been no Reorganization. Accordingly,
the Reorganization will not result in the termination of Prudential Active
Balanced Fund's taxable year, and Prudential Active Balanced Fund's tax
attributes enumerated in section 381(c) of the Code will be taken into
account by Jennison Active Balanced Fund as if there had been no
Reorganization. The part of Prudential Active Balanced Fund's taxable year
before the Reorganization will be included in Jennison Active Balanced
Fund's taxable year after the Reorganization;
4.4. Jennison Series Fund shall have received at the Effective Time a
favorable opinion from Gardner, Carton & Douglas, counsel to PDF, dated as of
the Effective Time, to the effect that:
4.4.1. PDF 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 Prudential
Active Balanced Fund has been duly established in accordance with the terms
of PDF's Declaration of Trust as a separate series of PDF;
4.4.2. This Agreement has been duly authorized, executed, and delivered
by PDF and, assuming due authorization, execution, and delivery of this
Agreement by Jennison Series Fund, is a valid and binding obligation of PDF
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, 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;
4.4.3. The execution and delivery of this Agreement did not, and the
performance by PDF of its obligations hereunder will not, (a) violate PDF's
Declaration of Trust or By-Laws or (b) result in a default or a breach of
(i) the Management Agreement dated October 30, 1996 between PDF and
Prudential Investments Fund Management LLC (PIFM), (ii) the Custodian
Agreement dated October 30, 1992 between PDF and State Street Bank and
Trust Company and (iii) the Distribution Agreement dated February 19, 1997
between PDF and Prudential Securities Incorporated; 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 PDF 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;
4.4.4. All regulatory consents, authorizations and approvals required to
be obtained by PDF under the federal laws of the United States and Chapter
38 of the Delaware Code for the consummation of the transactions
contemplated by this Agreement have been obtained;
4.4.5. Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against PDF involving Prudential Active Balanced
Fund that would be required to be disclosed in the Registration Statement
and is not so disclosed;
A-9
<PAGE>
4.4.6. PDF 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
4.4.7. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no material litigation or administrative proceeding
or investigation of or before any court or governmental body is presently
pending or threatened against PDF (with respect to Prudential Active
Balanced Fund) or any of its properties or assets distributable or
allocable to Prudential Active Balanced Fund, and (b) PDF 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 PDF and certificates of public
officials. As to matters of Delaware law, such counsel may rely upon opinions
of Delaware counsel reasonably satisfactory to Jennison Series Fund, in which
case the opinion shall state that both such counsel and Jennison Series 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.
4.5. PDF shall have received at the Effective Time a favorable opinion from
Gardner, Carton & Douglas, counsel to Jennison Series Fund, dated as of the
Effective Time, to the effect that:
4.5.1. Jennison Series 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, and Jennison Active Balanced Fund has been duly established in
accordance with the terms of Jennison Series Fund's Articles of
Incorporation as a separate series of Jennison Series Fund;
4.5.2. This Agreement has been duly authorized, executed and delivered by
Jennison Series Fund and, assuming due authorization, execution and
delivery of this Agreement by PDF, is a valid and binding obligation of
Jennison Series 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, 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;
4.5.3. The execution and delivery of this Agreement did not, and the
performance by Jennison Series Fund of its obligations hereunder will not,
(a) violate Jennison Series Fund's Articles of Incorporation or By-Laws or
(b) result in a default or a breach of certain specified agreements to be
entered into by Jennison Series Fund; 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 Series 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;
A-10
<PAGE>
4.5.4. All regulatory consents, authorizations and approvals required to
be obtained by Jennison Series Fund under the federal laws of the United
States and the laws of the State of Maryland for the consummation of the
transactions contemplated by this Agreement have been obtained;
4.5.5. Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Jennison Series Fund involving Jennison
Active Balanced Fund that would be required to be disclosed in the
Registration Statement and is not so disclosed;
4.5.6. Jennison Series 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
4.5.7. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no material litigation or administrative proceeding
or investigation of or before any court or governmental body is presently
pending or threatened against Jennison Series Fund (with respect to
Jennison Active Balanced Fund) or any of its properties or assets
distributable or allocable to Jennison Active Balanced Fund, and (b)
Jennison Series Fund is not a party to or subject to the provision of any
order, decree or judgment of any court or government 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 Series Fund and certificates
of public officials. As to matters of Maryland law, such counsel may rely upon
opinions of Maryland counsel reasonably satisfactory to PDF, in which case the
opinion shall state that both such counsel and PDF 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.
4.6. PDF shall have prepared a proxy statement in compliance with the 1934
Act and the 1940 Act in connection with a meeting of Prudential Active
Balanced Fund's shareholders for the purpose, inter alia, of voting on the
Reorganization and this Agreement; and the Reorganization and this Agreement
shall have been adopted and approved by the affirmative vote of the holders of
the requisite number of the outstanding Prudential Active Balanced Fund Shares
entitled to vote thereon as required by law at the time such vote is taken;
4.7. Prior to the Closing, the directors of Jennison Series Fund shall have
authorized the issuance of, and Jennison Active Balanced Fund shall have
issued, a share or shares of Jennison Active Balanced Fund to PIFM or an
affiliate thereof for consideration for the purpose of enabling PIFM or such
affiliate to vote on the matters referred to in paragraphs 4.8; and
4.8. Jennison Series Fund (on behalf of Jennison Active Balanced Fund) shall
have entered into a Management Agreement with PIFM, a Distribution Agreement
with Prudential Securities Incorporated, Plans of Distribution for Class A,
Class B and Class C Shares, a Transfer Agency and Service Agreement with
Prudential Mutual Fund Services LLC and a Custodian Agreement with State
Street Bank and Trust Company. Each such agreement shall have been approved by
Jennison Series Fund's directors and, to the extent required by law, by such
of those directors who are not "interested persons" thereof (as defined in the
1940 Act) (Independent Directors) and, to the extent required by law, by PIFM
or its affiliate as the sole shareholder of Jennison Active Balanced Fund.
A-11
<PAGE>
At any time prior to the Closing, any of the foregoing conditions (except
that set forth in paragraph 4.4) may be waived by the trustees/directors of
either Investment Company if, in their judgment, such waiver will not have a
material adverse effect on the interests of Prudential Active Balanced Fund's
shareholders.
5.AMENDMENT.
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Prudential Active Balanced Fund's
Shareholders, in such manner as may be mutually agreed upon in writing by the
parties; provided that following such approval no such amendment shall have a
material adverse effect on the Shareholders' interests.
6.TERMINATION.
The trustees/directors of either Investment Company may terminate this
Agreement and abandon the Reorganization, notwithstanding approval thereof by
Prudential Active Balanced Fund's Shareholders, at any time prior to the
Closing, if circumstances should develop that, in their judgment, make
proceeding with this Agreement inadvisable.
7.GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
internal 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.
A-12
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officers as of the day and year first written
above.
PRUDENTIAL DRYDEN FUND,
on behalf of its series,
Prudential Active Balanced Fund
/s/ Richard A. Redeker
By: _________________________________
Richard A. Redeker, President
PRUDENTIAL JENNISON SERIES FUND,
INC.,
on behalf of its series,
Prudential Jennison Active
Balanced Fund
/s/ Thomas A. Early
By: _________________________________
Thomas A. Early, Vice President
A-13
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SYNOPSIS.................................................................. 2
General................................................................. 2
The Proposed Conversion and Liquidation................................. 2
Reasons for the Proposed Conversion..................................... 3
Structure of the Series................................................. 4
Investment Objectives and Policies...................................... 5
Certain Differences Between the Series.................................. 5
Fees and Expenses....................................................... 5
Management Fees....................................................... 5
Distribution Fees..................................................... 6
Transfer Agency Fees.................................................. 6
Other Expenses........................................................ 7
Expense Ratios, Fee Waivers and Subsidy............................... 7
Purchase of Shares...................................................... 8
Class A Shares.......................................................... 9
Reduction and Waiver of Initial Sales Charges......................... 9
Class B and Class C Shares.............................................. 11
Class Z Shares.......................................................... 11
Redemptions--How to Sell Your Shares.................................... 11
Conversion Feature--Class B Shares...................................... 12
Exchange Privileges..................................................... 13
Dividends and Other Distributions....................................... 14
Federal Income Tax Consequences of the Proposed Conversion.............. 14
PRINCIPAL RISK FACTORS.................................................... 14
THE PROPOSED TRANSACTION.................................................. 15
Agreement and Plan of Conversion and Liquidation........................ 15
Reasons for the Conversion.............................................. 16
Description of Securities to be Issued.................................. 16
Federal Income Tax Considerations....................................... 16
Certain Comparative Information About Jennison Series Fund and PDF...... 17
Organization.......................................................... 17
Capitalization........................................................ 17
Shareholder Meetings and Voting Rights................................ 17
Shareholder Liability................................................. 18
Liability and Indemnification of Directors/Trustees................... 18
Pro Forma Capitalization and Ratios..................................... 19
INFORMATION ABOUT THE PORTFOLIO........................................... 20
INFORMATION ABOUT ACTIVE BALANCED FUND.................................... 40
MISCELLANEOUS............................................................. 42
Additional Information.................................................. 42
Legal Matters........................................................... 42
Experts................................................................. 42
VOTING INFORMATION........................................................ 42
OTHER MATTERS............................................................. 43
SHAREHOLDERS' PROPOSALS................................................... 44
APPENDIX A--Agreement and Plan of Conversion and Liquidation.............. A-1
ENCLOSURES
Prospectus of Prudential Active Balanced Fund dated November 29, 1996, as
supplemented on June 18, 1997 and September 8, 1997
Annual Report of Prudential Active Balanced Fund for the fiscal year
ended September 30, 1997
</TABLE>
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.-- PRUDENTIAL JENNISON ACTIVE BALANCED
FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 24, 1997
ACQUISITION OF ASSETS OF
PRUDENTIAL DRYDEN FUND--PRUDENTIAL ACTIVE BALANCED FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
----------------
BY AND IN EXCHANGE FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF
PRUDENTIAL JENNISON ACTIVE BALANCED FUND, A SERIES OF
PRUDENTIAL JENNISON SERIES FUND, INC.
This Statement of Additional Information specifically relates to the
proposed transfer of all of the assets and the assumption of all of the
liabilities, if any, of Prudential Active Balanced Fund (Active Balanced
Fund), a portfolio of Prudential Dryden Fund (PDF), by Prudential Jennison
Active Balanced Fund (the Portfolio), a portfolio of Prudential Jennison
Series Fund, Inc. (Jennison Series Fund). This Statement of Additional
Information consists of this cover page and the following described documents,
each of which is attached hereto and incorporated herein by reference:
1. Statement of Additional Information of Jennison Series Fund.
2. Annual Report of Prudential Active Balanced Fund for the fiscal year
ended September 30, 1997.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated
November 24, 1997, relating to the above-referred matter. A copy of the
Prospectus and Proxy Statement may be obtained from Jennison Series Fund
without charge by writing or calling Jennison Series Fund at the address or
phone number listed above.
1
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Statement of Additional Information dated January 13, 1997
(as supplemented May 15, 1997)
Prudential Jennison Series Fund, Inc. (the Company) is an open-end,
diversified, management investment company consisting of two series:
Prudential Jennison Growth Fund (Growth Fund) and Prudential Jennison Growth &
Income Fund (Growth & Income Fund) (each a Fund and collectively the Funds).
The investment objective of Growth Fund is long-term growth of capital. The
Growth 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
Growth Fund intends to invest at least 65% of its total assets in equity
securities of companies that exceed $1 billion in market capitalization. The
Growth Fund may also invest in (i) equity securities of other companies
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. The Growth Fund may engage in various
derivative transactions, such as using options on stocks, stock indices and
foreign currencies, entering into 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.
The primary investment objective of Growth & Income Fund is long-term growth
of capital and income, with current income as a secondary objective. The
Growth & Income Fund seeks to achieve this objective by investing primarily in
common stocks of established companies with growth prospects believed to be
underappreciated by the market. The Growth & Income Fund may also invest in
(i) other common stocks, preferred stock and securities convertible into
common stock, (ii) equity and debt securities of foreign issuers (with respect
to 20% of its total assets), including ADRs, and (iii) fixed-income
securities, including corporate and other debt obligations and obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. The Growth & Income Fund may also engage in short sales and
in various derivative transactions, such as using options on stocks, stock
indices and foreign currencies, entering into foreign currency exchange
contracts and the purchase and sale of futures contracts on stock indices and
debt securities and options thereon to hedge its portfolio and to attempt to
enhance return.
There can be no assurance that the Funds' investment objectives will be
achieved. See "Investment Objectives and Policies."
The Company's address is Gateway Center Three, Newark, New Jersey 07102-4077,
and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Funds' Prospectus, dated January 13, 1997 (as
supplemented May 15, 1997), copies of which may be obtained from the Company
upon request.
TABLE OF CONTENTS
<TABLE>
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CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
General Information...................................... B-2 25
Investment Objectives and Policies....................... B-2 8
Investment Restrictions.................................. B-14 18
Directors and Officers................................... B-15 18
Manager.................................................. B-20 19
Distributor.............................................. B-22 20
Portfolio Transactions and Brokerage..................... B-25 22
Purchase and Redemption of Fund Shares................... B-26 26
Shareholder Investment Account........................... B-29 37
Net Asset Value.......................................... B-34 22
Taxes.................................................... B-34 23
Performance Information.................................. B-37 23
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants................................. B-39 22
Financial Statements..................................... B-40 --
Independent Auditors' Report............................. B-49 --
Description of Security Ratings.......................... A-1 --
Appendix I--Historical Performance Data.................. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Information Relating to The Prudential..... III-1 --
</TABLE>
<PAGE>
GENERAL INFORMATION
The Company changed its name from Prudential Jennison Fund, Inc. to
Prudential Jennison Series Fund, Inc., effective on September 10, 1996, in
connection with the offering of a second series, Prudential Jennison Growth &
Income Fund. The existing series of the Company was redesignated Prudential
Jennison Growth Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Company is an open-end, diversified, management investment company
consisting of two series. Each series operates as a separate fund with its own
investment objectives and policies. The investment objective of the Growth
Fund is long-term growth of capital. The Growth 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 Growth Fund intends to invest at least 65%
of its total assets in equity securities of companies that exceed $1 billion
in market capitalization. The primary investment objective of the Growth &
Income Fund is long-term growth of capital and income, with current income as
a secondary objective. The Growth & Income Fund seeks to achieve its
objectives by investing primarily in common stocks of established companies
with growth prospects believed to be underappreciated by the market. See "How
the Funds Invest--Investment Objectives and Policies" in the Prospectus. There
can be no assurance that the Funds' investment objectives 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. Each 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. Each Fund may invest in securities issued by agencies of
the U.S. Government or instrumentalities of the U.S. Government except that
the Growth & Income Fund does not intend to invest in mortgage-related
securities. 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, a 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 a 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.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. 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.
B-2
<PAGE>
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Growth 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 Growth 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. During
periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending
the projected average maturity of the mortgage-backed securities. This
maturity extension risk may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
Growth 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.
FOREIGN DEBT SECURITIES
Each Fund is permitted to invest in foreign corporate and government
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" 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
Each 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
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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. A 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 a 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. A Fund may also
write a call option or write a put option if it maintains cash or liquid
assets with a value equal to the exercise price in a segregated account with
its Custodian. A Fund may also write a put option if it 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.
A 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; a 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.
A 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, each
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
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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 a 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 a 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 a 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 a 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 a 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
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institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders. Each 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.
RISKS OF OPTIONS ON INDICES
A 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, a 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 policy of each Fund
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. A
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
a 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, a 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 a Fund's portfolio probably will not correlate precisely
with movements in the level of the index and, therefore, a 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 a 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 a Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless a 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 a Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of such Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When a 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, a 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 a Fund
would be able to deliver the underlying securities in settlement, a Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the
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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 a 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 a 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 a
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
Each Fund may enter into forward foreign currency exchange contracts in
several circumstances. When a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars, for the purchase or sale of the amount
of foreign currency involved in the underlying transactions, a 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 is 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, a 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
a 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, equity securities or other liquid,
unencumbered assets 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.
A Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a 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
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the market value of the security is less than the amount of foreign currency
that a 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 a 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 a 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.
Each Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, a 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 a 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 a 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 a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
FUTURES CONTRACTS
As a purchaser of a futures contract, a Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures
contract at a specified time in the future for a specified price. As a seller
of a futures contract, a Fund incurs an obligation to deliver the specified
amount of the underlying obligation at a specified time in return for an
agreed upon price. The Growth & Income Fund may purchase futures contracts on
debt securities, including U.S. Government securities, aggregates of debt
securities, stock indices and foreign currencies. The Growth Fund may purchase
futures contracts on stock indices and foreign currencies.
A Fund will purchase or sell futures contracts for the purpose of hedging its
portfolio (or anticipated portfolio) securities against changes in prevailing
interest rates. If the investment adviser anticipates that interest rates may
rise and, concomitantly, the price of the Fund's portfolio securities may
fall, a Fund may sell a futures contract. If declining interest rates are
anticipated, a Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by a Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures contracts
will be bought or sold in order to close out a short or long position in a
corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security and the same delivery date. If the
sale price exceeds the offsetting purchase price, the seller would be paid the
difference and would realize a gain. If the offsetting purchase price exceeds
the sale price, the seller would pay the difference and would realize a loss.
Similarly,
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a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency)
and the same delivery date. If the offsetting sale price exceeds the purchase
price, the purchaser would realize a gain, whereas if the purchase price
exceeds the offsetting sale price, the purchaser would realize a loss. There
is no assurance that a Fund will be able to enter into a closing transaction.
When a Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets equal to
approximately 2-3% of the contract amount. Initial margin requirements are
established by the exchanges on which futures contracts trade and may, from
time to time, change. In addition, brokers may establish margin deposit
requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of funds by
a brokers' client but is, rather, a good faith deposit on a futures contract
which will be returned to a Fund upon the proper termination of the futures
contract. The margin deposits made are marked-to-market daily and a Fund may
be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or liquid assets, called
"variation margin," in the name of the broker, which are reflective of price
fluctuations in the futures contract.
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 a 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 a 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.
Successful use of futures contracts by a 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 a 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. A 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 a 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
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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
Each 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. A 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 or liquid assets equal to the aggregate exercise
price of the puts. A Fund will not enter into futures contracts or related
options if the aggregate initial margin and premiums exceed 5% of the
liquidation value of such 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.
Neither Fund intends 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. See "How the Funds Invest--Hedging and
Return Enhancement Strategies--Options Transactions" in the Prospectus.
Except as described below, a 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 a 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, equity securities or other
liquid, unencumbered assets 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 a 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 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,
equity securities or other liquid, unencumbered assets equal in value to the
difference. In addition, when a 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 or liquid assets 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 a Fund holds a call on the same
index as the call written where the exercise price
B-10
<PAGE>
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 or liquid assets in a segregated
account with its Custodian, it will not be subject to the requirements
described in this paragraph.
POSITION LIMITS. Transactions by a 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 a 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, a 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 foreign 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, a 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.
A 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 or liquid assets having a
value equal to or greater than such commitments. If a 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
Each 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 Growth
Fund will not engage in short sales other than short sales against-the-box.
The Growth & Income Fund will engage in short sales, including short sales
against-the-box. See "How the Funds Invest--Other Investments and Policies--
Short Sales" in the Prospectus and "Investment Restrictions" below.
REPURCHASE AGREEMENTS
Each Fund's repurchase agreements will be collateralized by U.S. Government
obligations. A Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Company's Board of
Directors. The investment adviser will monitor the creditworthiness of such
parties, under the general supervision of the Board of Directors of the
Company. In the event of a default or bankruptcy by a seller, a 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.
B-11
<PAGE>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, a 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 a 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. 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, a 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. A 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
A 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. A Fund may pledge up to 20% of its total assets to secure these
borrowings. If a Fund's asset coverage for borrowings falls below 300%, the
Fund will take prompt action to reduce its borrowings. If 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 a 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 of 1986, as amended (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." A 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 a 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, a 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
Neither Fund may hold more than 15% 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
B-12
<PAGE>
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, 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.
The staff of the SEC has taken the position, which the Funds will follow,
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.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, a Fund does not intend to invest more than 5%
of its total assets in such securities. If a Fund does invest in securities of
other investment
B-13
<PAGE>
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, each Fund may engage
in a substantial number of portfolio transactions, but neither Fund's
portfolio turnover rate is 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 a 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 a Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means with respect to each Fund, 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.
Each 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.
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. 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.
6. 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, with respect to Growth & Income Fund, futures
contracts on debt securities, and forward foreign currency exchange contracts
are not deemed to be commodities or commodity contracts.)
B-14
<PAGE>
7. 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. Neither Fund has adopted a fundamental
investment policy with respect to investments in restricted securities. See
"Illiquid Securities."
8. Make investments for the purpose of exercising control or management.
9. 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.
10. 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.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
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.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH
AND AGE (1) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- ------------- -----------------------------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a
closed-end investment company; prior thereto,
Vice Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary
and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; President, Treasurer and Director
of First Financial Fund, Inc. and The High
Yield Plus Fund, Inc.; President and Director
of Global Utility Fund, Inc.; Director of The
High Yield Income Fund, Inc.
Delayne Dedrick Gold Director Marketing and Management Consultant; Director of
(58) The High Yield Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller, Prudential Investments (since May
1996); Executive Vice President and Treasurer
(since December 1996), Prudential Mutual Fund
Management LLC (PMF); Senior Vice President
(since March 1987) of Prudential Securities
Incorporated (Prudential Securities); formerly
Chief Administrative Officer (July 1990-
September 1996), Director (January 1989-
September 1996), and Executive Vice President,
Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director
of The Asia Pacific Fund, Inc. (since May
1989); Director of The High Yield Income Fund,
Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS
AND AGE (1) POSITION WITH COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- --------------------- -----------------------------------------
<S> <C> <C>
Donald D. Lennox (78) Director Chairman (since February 1990) and Director
(since April 1989) of International Imaging
Materials, Inc. (thermal transfer ribbon
manufacturer); Retired Chairman, Chief
Executive Officer and Director of Schlegel
Corporation (industrial manufacturing) (March
1987-February 1989); Director of Gleason
Corporation, Personal Sound Technologies, Inc.
and The High Yield Income Fund, Inc.
Douglas H. McCorkindale Director Vice Chairman, Gannett Co. Inc. (publishing and
(57) media) (since March 1984); Director of Gannett
Co. Inc., Frontier Corporation and Continental
Airlines, Inc.
*Mendel A. Melzer, CFA Director Chief Investment Officer (since October 1996) of
(35) Prudential Mutual Funds; formerly Chief
751 Broad St. Financial Officer (November 1995-September
Newark, NJ 07102 1996) of Prudential Investments, Senior Vice
President and Chief Financial Officer of
Prudential Preferred Financial Services (April
1993-November 1995), Managing Director of
Prudential Investment Advisors (April 1991-
April 1993), and Senior Vice President of
Prudential Capital Corporation (July 1989-
April 1991); Chairman and Director of
Prudential Series Fund, Inc.; Director of The
High Yield Income Fund, Inc.
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager;
Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester,
Monroe County Water Authority, Rochester Jobs,
Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development
Corporation, Northeast Midwest Institute, The
Business Council of New York State, First
Financial Fund, Inc., The High Yield Income
Fund, Inc. and The High Yield Plus Fund, Inc.
Stephen P. Munn (54) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (1988-December 1993) of Carlisle
Companies Incorporated (manufacturer of
industrial products).
*Richard A. Redeker (53) President and Director Employee of Prudential Investments; formerly
751 Broad St. President, Chief Executive Officer and
Newark, NJ 07102 Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and Member
of the Operating Committee (1993-September
1996), Prudential Securities, Director
(October 1993-September 1996) of Prudential
Securities Group, Inc., Executive Vice
President, The Prudential Investment
Corporation (January 1994-September 1996),
Director (January 1994-September 1996),
Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc., and
Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director
of The High Yield Income Fund, Inc.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH
AND AGE (1) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- ------------- -----------------------------------------
<S> <C> <C>
Robin B. Smith (57) Director Chairman and Chief Executive Officer (since
August 1996) of Publishers Clearing House;
formerly President and Chief Executive Officer
(January 1988-August 1996) and President and
Chief Operating Officer (September 1981-
December 1988) of Publishers Clearing House;
Director of BellSouth Corporation, The Omnicom
Group, Inc., Texaco Inc., Spring Industries
Inc. and Kmart Corporation.
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since
January 1996) and Director (since September
1991) of Central Newspapers, Inc.; Chairman of
the Board (since January 1996), Publisher and
Chief Executive Officer (August 1991-December
1995) of Phoenix Newspapers, Inc.; formerly
Publisher of Time Magazine (May 1989-March
1991); formerly President, Publisher & CEO of
The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester; Director of The
High Yield Income Fund, Inc.
Clay T. Whitehead (58) Director President of National Exchange Inc. (new
business development firm) (since May 1983).
Susan C. Cote (42) Vice President Executive Vice President (since February 1997)
and Chief Financial Officer (since May 1996),
PMF; formerly Managing Director, Prudential
Investments and Vice President, The Prudential
Investment Corporation (February 1995-May
1996), Senior Vice President (January 1989-
January 1995) of Prudential Mutual Fund
Management, Inc. and Senior Vice President
(January 1992-January 1995) of Prudential
Securities.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General
Counsel (since December 1996), PMF; Vice
President and General Counsel, Prudential
Retirement Services (March 1994-March 1997);
formerly Associate General Counsel and Chief
Financial Services Officer, Frank Russell
Company (1988-1994).
S. Jane Rose (51) Secretary Senior Vice President (since December 1996),
PMF; formerly Senior Vice President (January
1991-September 1996) and Senior Counsel (June
1987-September 1996) of Prudential Mutual Fund
Management, Inc.; 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 (39) Treasurer and First Vice President (since December 1996) of
Principal Financial PMF; formerly First Vice President (January
and Accounting 1990-September 1996) of Prudential Mutual Fund
Officer Management, Inc.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH
AND AGE (1) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- ------------- -----------------------------------------
<S> <C> <C>
Marguerite E.H. Morrison Assistant Secretary Vice President (since December 1996) of PMF;
(41) formerly Vice President and Associate General
Counsel (June 1991-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Associate General Counsel of
Prudential Securities.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director of Prudential Investments and the
Private Asset Group of The Prudential Insurance
Company of America (Prudential) (since March
1996); formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); prior thereto,
Senior Tax Manager of Price Waterhouse (1981-
January 1993).
</TABLE>
- -------
(1) Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, Newark, New Jersey 07102-4077.
* "Interested" director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, Prudential Securities or PMF.
Directors and officers of the Company 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
Company, 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 Company, the Manager pays all
compensation of officers and employees of the Company as well as the fees and
expenses of all Directors of the Company who are affiliated persons of the
Manager.
The Company 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 $2,500, in addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
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 a Securities and Exchange Commission (SEC) exemptive order, at the
daily rate of return of a Fund (the Fund rate). Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Company's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Company.
Currently, Ms. Smith has agreed to defer her fees at the Fund rate.
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, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach
and Lennox are scheduled to retire on December 31, 1999 and December 31, 1997,
respectively.
B-18
<PAGE>
The following table sets forth aggregate compensation paid by the Company to
the Directors for the fiscal year ended September 30, 1996 and the aggregate
compensation paid to such Directors for service on the Boards of other
investment companies managed by Prudential Investments Fund Management LLC
(Fund Complex) for the calendar year ended December 31, 1996. In October 1996,
shareholders elected a new Board of Directors of the Company. Below are listed
all Directors who have served the Company during its most recent fiscal year
as well as the new Directors who took office after the shareholders' meeting
in October.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1996
COMPENSATION
PAID TO BOARD
PENSION OR RETIREMENT MEMBERS
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM COMPANY
COMPENSATION AS PART OF COMPANY BENEFITS UPON AND FUND
NAME AND POSITION FROM COMPANY EXPENSES RETIREMENT COMPLEX
- ----------------- ------------ --------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Beach, Edward D.--Direc-
tor -- None N/A $166,000(21/39)*
Dorsey, Eugene C.**--
Former
Director $7,500 None N/A $ 98,583(12/36)*
Gold, Delayne D.--Direc-
tor -- None N/A $175,308(21/42)*
Gunia, Robert F.(/1/)--
Director -- None N/A --
Lennox, Donald D.--Di-
rector -- None N/A $ 90,000(10/22)*
McCorkindale, Douglas
H.**
--Director -- None N/A $ 71,208(10/13)*
Melzer, Mendel A.(/1/)--
Director -- None N/A --
Mooney, Thomas T.**--Di-
rector -- None N/A $135,375(18/36)*
Munn, Stephen P.--Direc-
tor -- None N/A $ 49,125(6/8)*
Redeker, Richard
A.(/1/)--President and
Director -- None N/A --
Smith, Robin B.**--Di-
rector $7,500 None N/A $ 89,957(11/20)*
Weil, III, Louis A.--Di-
rector -- None N/A $ 91,250(13/18)*
Whitehead, Clay T.--Di-
rector -- None N/A $ 38,292(5/7)*
</TABLE>
- -------
* Indicates number of funds/portfolios in Fund Complex (including the Company)
to which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund
Complex (including the Company).
** Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1996 includes amounts deferred at the election of
Directors under the funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $111,535, $71,034,
$139,869 and $109,294 for Mr. Dorsey, Mr. McCorkindale, Mr. Mooney and Ms.
Smith, respectively.
As of April 18, 1997, the Directors and officers of the Company, as a group,
owned less than 1% of the outstanding common stock of each Fund.
As of April 18, 1997, beneficial owners, directly or indirectly, of more than
5% of any class of shares of Prudential Jennison Growth Fund were: 401K
Holding Account, FBO ACEC Retirement Trust, PO Box 15040, New Brunswick, NJ
08906, owned approximately 580,628 Class A shares (or approximately 6.9% of
the outstanding Class A shares) and Pru Defined Contribution SVCS, FBO Non-
Trust Accounts, Attn: John Surdy, 30 Scranton Office Park, Moosic,
Pennsylvania owned approximately 22,022,734 Class Z shares (or approximately
60.7% of the outstanding Class Z shares). As of April 18, 1997, beneficial
owners, directly or indirectly, of more than 5% of any class of shares of
Prudential Jennison Growth & Income Fund were: Jennison Associates Capital
Co., Saving Plan TTEE: J. Kanary, M. Baiso & B. Goldberg, c/o Corporate
Services, 466 Lexington Ave. 18th Floor, New York, NY 10017 owned
approximately 156,061 Class A shares (or approximately 6.3% of the outstanding
Class A shares); Bradley L. Goldberg, 502 Orienta Avenue, Mamaroneck, New York
owned approximately 138,741 Class A shares (or approximately 5.6% of the
outstanding Class A shares); James M. Rodney TTEE, James M.
B-19
<PAGE>
Rodney Trust, UA DTD 06/07/79, 725 Hanna, Birmingham, Michigan owned
approximately 32,550 Class C shares (or approximately 6.1% of the outstanding
Class C shares); Prudential Trust Company, FBO Pru-DC Trust Accounts, ATTN:
John Surdy, 30 Scranton Office Park, Moosic, PA 18507-1774 owned approximately
7,689 Class Z shares (or approximately 40.7% of the outstanding Class Z
shares); Mr. John A. Hart TTEE, John A. & Eleanor E. Hart Family Trust UA DTD
08/25/95, 2113 Evergreen Ridge Dr., Cincinnati OH 45215-5713 owned 4,802 Class
Z shares (or approximately 25.4% of the outstanding Class Z shares);
Prudential Securities C/F, Harold Quebedeaux, IRA DTD 12/17/91, PO Box 366,
Mansura, LA 71350-0366 owned 1,067 Class Z shares (or approximately 5.6% of
the outstanding Class Z shares).
As of April 18 1997, Prudential Securities was the record holder for other
beneficial owners of 5,811,292 Class A shares (approximately 69.2% of such
shares outstanding), 16,880,324 Class B shares (approximately 70.4% of such
shares outstanding), 1,230,178 Class C shares (approximately 86.1% of such
shares outstanding) and 93,211 Class Z shares (approximately 0.25% of such
shares outstanding) of Growth Fund; and 2,135,272 Class A shares
(approximately 87.1% of such shares outstanding), 5,253,271 Class B shares
(approximately 89.8% of such shares outstanding), 518,475 Class C shares
(approximately 98.0% of such shares outstanding) and 11,145 Class Z shares
(approximately 59.0% of such shares outstanding) of Growth & Income Fund. 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 Company is Prudential Investments Fund Management LLC,
formerly known as Prudential Mutual Fund Management LLC (PIFM or the Manager),
Gateway Center Three, Newark, New Jersey 07102-4077. PIFM serves as manager to
all of the other investment companies that, together with the Funds, comprise
the Prudential Mutual Funds. See "How the Funds are Managed--Manager" in the
Prospectus. As of April 30, 1997, PIFM managed and/or administered open-end
and closed-end management investment companies with assets of approximately
$54.6 billion. According to the Investment Company Institute, as of December
31, 1996, the Prudential Mutual Funds were the 15th largest family of mutual
funds in the United States.
PIFM is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Company (the Management
Agreement), PIFM, subject to the supervision of the Company's Board of
Directors and in conformity with the stated policies of each Fund, manages
both the investment operations of each Fund and the composition of each Fund's
portfolio, including the purchase, retention, disposition and loan of
securities and other assets. In connection therewith, PIFM is obligated to
keep certain books and records of the Company. PIFM also administers the
Company's corporate affairs and, in connection therewith, furnishes the
Company with office facilities, together with those ordinary clerical and
bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Funds' custodian (the Custodian), and PMFS, the Funds'
transfer and dividend disbursing agent. The management services of PIFM for
the Funds are not exclusive under the terms of the Management Agreement and
PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of each 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 a Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Fund's business) for any fiscal
year exceed the lowest applicable annual expense limitation established and
B-20
<PAGE>
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PIFM will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PIFM will be paid by PIFM to the Company.
Currently, the Company believes that there are no such expense limitations.
In connection with its management of the corporate affairs of the Company,
PIFM bears the following expenses:
(a) the salaries and expenses of all personnel of the Company and the
Manager, except the fees and expenses of Directors who are not affiliated
persons of PIFM or the Company's investment adviser;
(b) all expenses incurred by PIFM or by the Company in connection with
managing the ordinary course of a Fund's business, other than those assumed by
a Fund as described below; and
(c) the fees payable to the Subadviser pursuant to the Subadvisory Agreement
between PIFM and Jennison (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Company 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 Company'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 each Fund and of pricing each Fund's shares,
(d) the charges and expenses of legal counsel and independent accountants for
the Company, (e) brokerage commissions and any issue or transfer taxes
chargeable to the Company in connection with its securities transactions, (f)
all taxes and corporate fees payable by the Company to governmental agencies,
(g) the fees of any trade associations of which the Company may be a member,
(h) the cost of stock certificates representing shares of the Company, (i) the
cost of fidelity and liability insurance, (j) certain organization expenses of
the Company and the fees and expenses involved in registering and maintaining
registration of the Company and of its shares with the SEC, registering the
Company as a broker or dealer and qualifying its shares under state securities
laws, including the preparation and printing of each 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
Company's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by a 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, including a majority of the Directors who are not parties to the
contract or interested persons of any such parties as defined in the
Investment Company Act, on April 9, 1996.
PIFM 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 Company. In connection therewith, Jennison is obligated to keep certain
books and records of each Fund. Under the Subadvisory Agreement, Jennison,
subject to the supervision of PIFM, is responsible for managing the assets of
each Fund in accordance with its investment objectives, investment program and
policies. Jennison determines what securities and
B-21
<PAGE>
other instruments are purchased and sold for each Fund and is responsible for
obtaining and evaluating financial data relevant to each Fund. PIFM continues
to have responsibility for all investment advisory services pursuant to the
Management Agreement. Under the Subadvisory Agreement, PIFM compensates
Jennison for its services at an annual rate of .30 of 1% of each 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.
For the fiscal period from November 2, 1995 (commencement of investment
operations) through September 30, 1996, PIFM received from Growth Fund
management fees of $1,418,805, of which $709,402 was paid to Jennison
Associates. The Growth & Income Fund was not offered during the fiscal year
ended September 30, 1996.
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 Company, PIFM 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 Subsidiary
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 parties as defined in the Investment Company Act, on April 9, 1996.
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, Class C and Class Z shares of the Company.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (also the
Distributor) incurs the expenses of distributing the Company's Class A, Class
B and Class C shares. See "How the Funds are Managed--Distributor" in the
Prospectus. Prudential Securities serves as the Distributor of Class Z shares
and incurs the expenses of distributing the Class Z shares under a
Distribution Agreement with the Company, none of which are reimbursed by or
paid for by the Fund.
The Class A Plan provides that (i) .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Class B and Class C Plans provide that (i) .25 of 1% of the average daily net
assets of the Class B and Class C shares, respectively, may be paid as a
service fee and (ii) .75 of 1% (not including the service fee) may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge). On April 9 and July 9, 1996, the
Board of Directors of the Company, including a majority of the Directors who
are not interested persons of the Company and who have no direct or indirect
financial interest in the operation of the Plans or any agreement related
thereto (Rule 12b-1 Directors), at a meeting called for the purpose of voting
on each Plan, approved the Class A, Class B and Class C Plan and the
Distribution Agreement with respect to Growth Fund and Growth & Income Fund,
respectively. No shares of the Growth & Income Fund were outstanding during
the fiscal period ended September 30, 1996.
Class A Plan. For the fiscal period from November 2, 1995 (commencement of
investment operations of the Growth Fund) through September 30, 1996, Growth
Fund paid distribution fees of $161,221 to Prudential Securities under the
Class A Plan. This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares
of the Growth Fund. In addition, for the same period, Prudential Securities
received approximately $909,000 in initial sales charges with respect to the
sale of Class A shares.
B-22
<PAGE>
Class B Plan. For the fiscal period from November 2, 1995 (commencement of
investment operations of the Growth Fund) through September 30, 1996,
Prudential Securities received $1,482,118 from the Growth Fund under the Class
B Plan and spent approximately $3,614,000 in distributing Class B shares of
the Growth Fund. It is estimated that of the latter amount, approximately
$118,000 (3.3%) was spent on printing and mailing of prospectuses to other
than current shareholders; $1,429,000 (39.5%) on compensation to Pruco
Securities Corporation, an affiliated broker-dealer (Prusec), for commissions
to its representatives and other expenses, including an allocation on account
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of shares; and $2,067,000 (57.2%) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers
($673,700 or 18.6%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($1,393,300 or 38.6%). The term
"overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities branch offices in
connection with the sale of Growth Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Growth Fund shares; and (d) other
incidental expenses relating to branch promotion of Growth Fund shares.
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the same period, Prudential Securities
received approximately $350,000 in contingent deferred sales charges
attributable to Class B shares.
Class C Plan. For the fiscal period from November 2, 1995 (commencement of
investment operations of the Growth Fund) through September 30, 1996,
Prudential Securities received $114,523 from Growth Fund under the Class C
Plan and spent approximately $78,000 in distributing Class C shares of Growth
Fund. It is estimated that of the latter amount approximately 10.9% ($8,500)
was spent on printing and mailing of prospectuses to other than current
shareholders; 11.0% ($8,600) on compensation to Prusec for commissions to its
representative and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred by it for
distribution of shares of the Growth Fund; 78.1% ($60,900) on the aggregate of
(i) payments of commission and account servicing fees to financial advisors
39.6% ($30,900) and (ii) an allocation of overhead and other branch office
distribution-related expenses 38.5% ($30,000).
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by holders of Class C shares upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. For the same period, Prudential Securities
received approximately $10,000 in contingent deferred sales charges
attributable to Class C shares.
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 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. A 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 a 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.
B-23
<PAGE>
Pursuant to the Distribution Agreement, the Company has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order
issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI
to cease and desist from violating the federal securities laws and imposed a
$10 million civil penalty; and (iii) required PSI to adopt certain remedial
measures including the establishment of a Compliance Committee of its Board of
Directors. Pursuant to the terms of the SEC settlement, PSI established a
settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has
agreed to provide additional funds, if necessary, for that purpose. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action. In settling the
above referenced matters, PSI neither admitted nor denied the allegations
asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December
31, 1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend solicitation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Texas office to new customers during a period of twenty
consecutive business days, and agreed that its other Texas offices would be
subject to the same restrictions for a period of five consecutive business
days. PSI also agreed to institute training programs for its securities
salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States
Postal Inspection Service. PSI further agreed to obtain a mutually acceptable
outside director to sit on the Board of Directors of PSG and the Compliance
Committee of PSI. The new director serves as an independent "ombudsman" whom
PSI employees can call anonymously with complaints about ethics and
compliance. Prudential Securities reports any allegations or instances of
criminal conduct and material improprieties to the new director. The new
director submits compliance reports which identify any such allegations or
instances of criminal conduct and material improprieties every three months
and shall continue to do so 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
B-24
<PAGE>
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 a 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 Company, 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. A 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 a 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 Company, will not significantly affect a
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, a 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 a 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 a 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 a 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 a 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 a 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,
B-25
<PAGE>
the Manager is authorized to pay higher commissions on brokerage transactions
for a Fund to brokers other than Prudential Securities (or any affiliate) in
order to secure research and investment services described above, subject to
review by the Company'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 Company's Board of
Directors. The Company 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 Company.
In order for Prudential Securities (or any affiliate) to effect any portfolio
transactions for a 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 Company, 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, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for a Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to a 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. The Growth Fund paid
commissions of $436,218 for the fiscal period ended September 30, 1996, none
of which was paid to Prudential Securities or any of its affiliates.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each 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
each Fund are offered to a limited group of investors at net asset value
without any sales charges. See "Shareholder Guide--How to Buy Shares of the
Funds" in the Prospectus.
Each class represents an interest in the same assets of a 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 sales charge or distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv)
only Class B shares have a conversion feature and (v) Class Z shares are
offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
B-26
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Company and the
Distributor, Class A shares are sold with a maximum sales charge of 5% and
Class B*, Class C* and Class Z shares are sold at net asset value. Using the
net asset values of Growth Fund and Growth & Income Fund at March 31, 1997,
the maximum offering price of Growth Fund's and Growth & Income Fund's shares
is as follows:
<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL JENNISON
JENNISON GROWTH &
GROWTH INCOME
FUND FUND
---------- ----------
<S> <C> <C>
CLASS A
Net asset value and redemption price per Class A share... $11.16 $10.44
Maximum sales charge (5% of offering price).............. .59 .55
------ ------
Offering price to public................................. $11.75 $10.99
====== ======
CLASS B
Net asset value, redemption price and offering price per
Class B share*.......................................... $11.04 $10.43
====== ======
CLASS C
Net asset value, redemption price and offering price per
Class C share*.......................................... $11.04 $10.43
====== ======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share........................................... $11.19 $10.48
====== ======
</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.
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 a 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.
B-27
<PAGE>
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more retirement or group
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 any
retirement or group plans.
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 a 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 Each 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 a Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at net asset value by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen month period,
a specified number of eligible employees or participants (Participant Letter
of Intent).
For purposes of the Investment Letter of Intent, all shares of a Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period, and in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans where the employer or plan sponsor
will be responsible for paying any applicable sales charge. The effective date
of an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to
the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Company to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference
B-28
<PAGE>
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 a Fund pursuant to a Letter of Intent should carefully read
such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to
individual participants in any retirement or group plans.
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>
<C> <S>
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.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she Administration award letter or a letter
is unable to engage in any sub- from a physician on the physician's
stantial gainful activity by letterhead stating that the shareholder
reason of any medically deter- (or, in the case of a trust, the grantor)
minable physical or mental im- is permanently disabled. The letter must
pairment which can be expected also indicate the date of disability.
to result in death or to be of
long-continued and indefinite
duration.
Distribution from an IRA or A copy of the distribution form from the
403(b) 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 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. Each Fund makes
available to its shareholders the following privileges and plans.
B-29
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. For the convenience of
investors, all dividends and distributions are automatically reinvested in
full and fractional shares of the applicable Fund. An investor may direct the
Transfer Agent in writing not less than five full business days prior to the
record date to have subsequent dividends or distributions sent in cash rather
than reinvested. In the case of recently purchased shares for which
registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a
cash payment representing a dividend or distribution may reinvest such
dividend or distribution at net asset value by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent.
EXCHANGE PRIVILEGE. The Company makes available to its shareholders the
Exchange Privilege. The Company makes available to its shareholders the
privilege of exchanging their shares of a Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares
of a Fund. All exchanges are made on the basis of relative net asset value
next determined after 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 a Fund may exchange their Class A shares for shares
of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of a Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., 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.
B-30
<PAGE>
Class B and Class C shares of a Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at
the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into a Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into a 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. For
purposes of calculating the seven year 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.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z: Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Funds' Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including a Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed
amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average
cost per share is lower than it would be if a constant number of shares were
bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(/1/)
B-31
<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>
- -------
(/1/) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition,
fees, room and board for the 1993-1994 academic year.
(/2/) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of a Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
See "Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of a Fund
monthly by authorizing his or her bank account or Prudential Securities
Account (including a Command Account) to be debited to invest specified dollar
amounts in shares of a Fund. The investor's bank must be a member of the
Automatic Clearing House System. Stock certificates are not issued to ASAP
participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
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
B-32
<PAGE>
because of the sales charges applicable to (i) the purchase of Class A shares
and (ii) the withdrawal of Class B and Class C shares. Each shareholder should
consult his or her own tax adviser with regard to the tax consequences of the
plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction
of accounts by participants, or a pooled account arrangement. Information
regarding the establishment of these plans, and the administration, custodial
fees an other details are available from Prudential Securities or the Transfer
Agent.
Investors who are considering the adoption of such a plan should consult with
their own legal counsel or tax adviser with respect to the establishment and
maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(/1/)
<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 a Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in the IRA account will be subject to tax when withdrawn from the
account.
MUTUAL FUND PROGRAMS
From time to time, a Fund or the Company may be included in a mutual fund
program with other Prudential Mutual Funds. Under such a program, a group of
portfolios will be selected and thereafter marketed collectively. Typically,
these programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. A Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as a part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
B-33
<PAGE>
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 Company. In
accordance with procedures adopted by the Company's 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 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 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. Each 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 a 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 a 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 or Class Z shares as a result of the larger distribution-related
fee to which Class B and Class C shares are subject and the net asset value of
Class A shares will generally be lower than that of Class Z shares because
Class Z shares are not subject to any distribution or service fee. It is
expected, however, that the net asset value per share of each class will tend
to converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
TAXES
Each 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 and gains which are 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 a Fund's annual gross income (without reduction for
losses from the sale or other disposition of securities) be derived from
interest,
B-34
<PAGE>
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 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 a 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 a 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 a 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 a 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 a 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 a
Fund may invest. See "Investment Objectives 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 a 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.
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, a 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.
A 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 a 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
B-35
<PAGE>
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 a 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, a 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 a 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 a
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, a 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 may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements
of the Internal Revenue Code.
Because the original issue discount income earned by the Fund in a taxable
year may not be represented by cash income, the Fund may have to dispose of
other securities and use the proceeds to make distributions to satisfy the
Internal Revenue Code's distribution requirements.
Each Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. Each 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, a Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which a 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 a 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 a Fund by a
shareholder will be disallowed to the extent the shares are replaced within
the 61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
B-36
<PAGE>
A shareholder who acquires shares of a 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 such
Fund.
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 or a foreign
entity (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 a 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 a 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 a Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. A 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 a Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. A Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the
Funds Calculate 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.
B-37
<PAGE>
The average annual total returns for the period from November 2, 1995
(commencement of investment operations) through September 30, 1996 for the
Class A, Class B and Class C shares of Growth Fund were 4.2%, 3.9% and 7.9%,
respectively, and for the period from November 2, 1995 through March 31, 1997
for the Class A, Class B and Class C shares were 4.2%, 4.5% and 7.3%,
respectively. The average annual total return for Class Z shares of Growth
Fund from April 15, 1996 (commencement of investment operations) through March
31, 1997 was 8.8%. Shares of Growth & Income Fund were not offered during the
fiscal period ended September 30, 1996.
On September 20, 1996, the assets and liabilities of Growth Stock Fund (a
series of Prudential Dryden Fund, formerly The Prudential Institutional Fund)
were transferred to the Growth Fund in exchange solely for Class Z shares of
the Growth Fund (the Reorganization). The investment objectives and policies
of the Growth Stock Fund were substantially similar to those of Growth Fund
and both funds had the same investment adviser. Accordingly, if you purchased
shares of Growth Stock Fund at its inception on November 5, 1992, owned such
shares through September 20, 1996 (thereby participating in the
Reorganization), and continued to own Class Z shares received in the
Reorganization through September 30, 1996, your average annual total returns
(after fees and expenses) for the one, three and since inception (November 5,
1992) periods ended September 30, 1996 would have been 12.7%, 14.8% and 16.9%,
respectively, and for the one, three and since inception periods ended March
31, 1997 would have been 8.9%, 16.5% and 15.3%, respectively. In addition, the
aggregate total returns for such periods would have been 12.7%, 51.5% and
83.6%, respectively, and for the one, three and since inception periods ended
March 31, 1997 would have been 8.9%, 58.2% and 87.1%, respectively.
AGGREGATE TOTAL RETURN. A 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 Funds Calculate Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in a Fund and is computed according to the following formula:
ERV - P
-----
P
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 returns for the period
from November 2, 1995 (commencement of investment operations) through
September 30, 1996 for the Class A, Class B and Class C shares of Growth Fund
were 9.7%, 8.9% and 8.9%, respectively. The aggregate total returns for the
one year period ended March 31, 1997 and for the period from November 2, 1995
through March 31, 1997 for the Class A, Class B and Class C shares of Growth
Fund were 7.4%, 6.6% and 6.6%, respectively, and 11.6%, 10.4% and 10.4%,
respectively. The aggregate total returns for Class Z shares of Growth Fund
from April 15, 1996 (commencement of investment operations) through September
30, 1996 and from April 15, 1996 through March 31, 1997 were 6.4% and 8.4%,
respectively. The aggregate total returns for the period from November 7, 1996
(commencement of investment operations) through March 31, 1997 for the Class
A, Class B, Class C and Class Z shares of the Growth & Income Fund were 4.5%,
4.2%, 4.2% and 4.8%, respectively.
B- 38
<PAGE>
From time to time, the performance of a Fund may be measured against various
indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of
inflation./1/
[CHART]
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM
(1/1926 - 12/1994)
COMMON STOCKS - 10.2%
LONG-TERM GOVT. BONDS - 4.8%
INFLATION - 3.1%
- -------
/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 portfolio securities of each
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Subcustodians
provide custodial services for a Fund's foreign assets held outside the United
States. See "How the Funds are Managed--Custodian and Transfer and Dividend
Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of each
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to each 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. For the fiscal period ended September 30,
1996, Growth Fund incurred fees of approximately $312,000 for the services of
PMFS. PMFS is also reimbursed for its out-of-pocket expenses, including, but
not limited to, postage, stationery, printing, allocable communication
expenses and other costs. Growth & Income Fund did not commence investment
operations until November 1996.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
served as the Company's independent accountants for the fiscal year ended
September 30, 1996, and in that capacity audited the annual financial
statements of the Growth Fund. Price Waterhouse LLP, 1177 Avenue of the
Americas, New York, New York 10036, currently serves as the Company's
independent accountants and in that capacity will audit the Funds' annual
financial statements.
B-39
<PAGE>
Portfolio of Investments
as of September 30, 1996 PRUDENTIAL JENNISON GROWTH FUND
===============================================================
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--99.1%
COMMON STOCKS--99.1%
- ---------------------------------------------------------------
Aerospace/Defense--2.9%
215,900 Boeing CO. $ 20,402,550
- ---------------------------------------------------------------
Airlines--1.5%
144,300 Delta Airlines, Inc. 10,389,600
- ---------------------------------------------------------------
Apparel--1.4%
78,700 NIKE, Inc., Class B 9,562,050
- ---------------------------------------------------------------
Banks & Financial Services--1.6%
135,200 Chase Manhattan Corp. 10,832,900
- ---------------------------------------------------------------
Beverages--1.2%
285,300 PepsiCo, Inc. 8,059,725
- ---------------------------------------------------------------
Biotechnology--0.6%
219,232 Chiron Corp. (a) 4,165,408
- ---------------------------------------------------------------
Business Services--8.8%
323,250 CUC International, Inc. (a) 12,889,594
377,600 Eagle River Interactive, Inc. (a) 3,870,400
127,033 First Data Corp. 10,369,068
235,000 Manpower, Inc. 7,813,750
263,600 Omnicom Group 12,323,300
199,000 Reuters Holdings PLC (ADR) (United
Kingdom) 13,780,750
------------
61,046,862
- ---------------------------------------------------------------
Cellular Communications--0.9%
186,800 Vodafone Group PLC (ADR) (United
Kingdom) 6,374,550
- ---------------------------------------------------------------
Computer Systems/Peripherals--4.8%
119,300 Dell Computer Corp. (a) 9,275,575
311,000 Hewlett-Packard Co. 15,161,250
160,000 Seagate Technology, Inc. (a) 8,940,000
------------
33,376,825
- ---------------------------------------------------------------
EDP Software & Services--11.0%
245,600 America Online, Inc. (a) 8,749,500
315,325 Computer Associates International, Inc. 18,840,669
162,200 Electronic Data Systems Corp., (New) 9,955,025
199,700 Intuit, Inc. (a) 6,290,550
290,400 Macromedia, Inc. (a) 6,025,800
127,800 Microsoft Corp. (a) 16,853,625
174,400 SAP AG (ADR) (Germany) 9,897,200
------------
76,612,369
- ---------------------------------------------------------------
Electrical Equipment--1.3%
256,700 Picturetel Corp. (a) 9,048,675
- ---------------------------------------------------------------
Financial Companies--0.5%
96,500 Federal National Mortgage Assn. 3,365,438
- ---------------------------------------------------------------
Health Care Services--3.4%
267,900 Healthsouth Corp. (a) 10,280,663
345,200 PhyCor, Inc. (a) 13,139,175
------------
23,419,838
- ---------------------------------------------------------------
Household & Personal Care Products--4.2%
245,400 Gillette Co. 17,699,475
126,100 Kimherly-Clark Corp. 11,112,563
------------
28,812,038
- ---------------------------------------------------------------
Hotels--2.0%
497,200 Hilton Hotels Corp. 14,108,050
- ---------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
Portfolio Of Investments as
of September 30, 1996 PRUDENTIAL JENNISON GROWTH FUND
===============================================================
Shares Description Value (Note 1)
- ---------------------------------------------------------------
Industrial Technology/Instruments--2.1%
204,100 KLA Instruments Corp. (a) $ 4,592,250
220,200 Symhol Technologies, Inc. (a) 10,129,200
------------
14,721,450
- ---------------------------------------------------------------
Insurance--5.0%
80,600 CIGNA Corp. 9,661,925
181,900 MGIC Investment Corp. 12,255,512
260,432 Mutual Risk Management, Ltd. 7,552,528
84,500 UNUM Corp. 5,418,563
------------
34,888,528
- ---------------------------------------------------------------
Machinery--1.0%
187,000 Harnischfeger Industries, Inc. 7,059,250
- ---------------------------------------------------------------
Media--4.8%
118,000 Clear Channel
Communications, Inc. (a) 10,443,000
252,200 Disney (Walt) Co. 15,983,175
219,350 Infinity Broadcasting
Corp., Class A (a) 6,909,525
------------
33,335,700
- ---------------------------------------------------------------
Networking--6.8%
301,800 3Com Corp. (a) 18,126,862
130,300 Ascend Communications, Inc. (a) 8,616,088
327,600 Cisco Systems, Inc. (a) 20,331,675
------------
47,074,625
- ---------------------------------------------------------------
Oil Services--1.3%
111,700 Schlumberger, Ltd. 9,438,650
- ---------------------------------------------------------------
Pharmaceuticals--10.0%
101,400 Astra AB (Sweden) 4,285,261
82,600 Astra AB Class A (ADR) (Sweden) 3,484,688
80,800 Ciba-Geigy AG (ADR) (Switzerland) 5,140,900
4,190 Ciba-Geigy AG (Switzerland) 5,358,176
252,100 Johnson & Johnson Co. 12,920,125
162,900 Lilly (Eli) & Co. 10,507,050
181,200 Pfizer, Inc. 14,337,450
220,500 SmithKline Beecham PLC (ADR)
(United Kingdom) 13,422,937
------------
69,456,587
- ---------------------------------------------------------------
Publishing--1.5%
144,000 Scholastic Corp. (a) 10,440,000
- ---------------------------------------------------------------
Restaurants--1.1%
249,000 Lone Star Steakhouse
& Saloon, Inc. (a) 7,578,938
- ---------------------------------------------------------------
Retail--9.2%
373,700 AutoZone, Inc. (a) 10,837,300
267,200 Corporate Express, Inc. 10,387,400
182,500 Gap, Inc. 5,269,687
245,633 Home Depot, Inc. 13,970,377
278,400 Kohl's Corp. 10,022,400
163,400 Saks Holdings, Inc. 5,719,000
482,400 Sunglass Hut Int'l., Inc. (a) 7,688,250
------------
63,894,414
- ---------------------------------------------------------------
Electronic Components--5.4%
279,800 Intel Corp. 26,703,412
223,700 International Rectifier Corp. (a) 3,103,838
341,600 LSI Logic Corp.(a) 7,942,200
------------
37,749,450
- ---------------------------------------------------------------
Telecommunications Equipment--4.5%
355,900 Ericsson (L.M.) Telephone Co., Inc.
(ADR) (Sweden) 9,030,962
216,800 Nokia Corp. (ADR) (Finland) 9,593,400
178,400 Tellabs, Inc.(a) 12,599,500
------------
31,223,862
- ---------------------------------------------------------------
Telephones-0.3%
76,800 MCI Communications Corp. 1,968,000
------------
Total long-term investments
(cost $579,362,421) 688,406,332
- ---------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
Portfolio of Investments as of September 30, 1996
===================================================================
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- -------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.0%
COMMERCIAL PAPER--1.0%
P1 $ 6,602 Ford Motor Credit Co.,
5.36%, 10/1/96
(cost $6,602,000) $ 6,602,000
U.S. GOVERNMENT SECURITY
United States Treasury Bill
135 5.14%, 12/26/96
(cost $133,342) 133,342
-------------
Total short-term investments
(cost $6,735,342) 6,735,342
-------------
- -------------------------------------------------------------------
Total Investments--100.1%
(cost $586,097,763; Note 4) 695,141,674
Liabilities in excess
of other assets--(0.l%) (464,318)
-------------
Net Asset--100% $ 694,677,356
-------------
- ----------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH FUND
================================================================================
<TABLE>
<CAPTION>
Assets September 30, 1997
------------------
<S> <C>
Investments, at value (cost $586,097,763)................................................................... $695,141,674
Cash........................................................................................................ 453,117
Receivable for investments sold............................................................................. 5,671,677
Receivable for Fund shares sold............................................................................. 3,372,066
Dividends and interest receivable........................................................................... 370,243
Deferred expenses and other assets.......................................................................... 187,623
------------
Total assets............................................................................................. 705,196,400
------------
Liabilities
Payable for investments purchased........................................................................... 6,147,013
Payable for Fund shares reacquired.......................................................................... 3,222,198
Accrued expenses and other liabilities...................................................................... 592,921
Management fee payable...................................................................................... 346,672
Distribution fees payable................................................................................... 210,240
------------
Total liabilities........................................................................................ 10,519,044
------------
Net Assets.................................................................................................. 694,677,356
============
Net assets were comprised of:
Common stock, at par..................................................................................... $ 63,469
Paid-in capital in excess of par......................................................................... 594,746,508
------------
594,809,977
Accumulated net realized loss on investments............................................................. (9,176,492)
Net unrealized appreciation on investments............................................................... 109,043,871
------------
Net assets, September 30, 1996.............................................................................. $694,677,356
============
Class A:
Net asset value and redemption price per share
($85,439,568 / 7,790,185 shares of common stock issued and outstanding)............................... $10.97
Maximum sales charge (5.0% of offering price)............................................................ .58
------
Maximum offering price to public......................................................................... $11.55
======
Class B:
Net asset value, offering price and redemption price per share
($231,541,269 / 21,258A23 shares of common stock issued and outstanding).............................. $10.89
======
Class C:
Net asset value, offering price and redemption price per share
($15,280,552 / 1,402,944 shares of common stock issued and outstanding................................ $10.89
======
Class Z:
Net asset value, offering price and redemption price per share
($362,415,967 / 33,017,749 shares of common stock issued and outstanding............................... $10.98
======
</TABLE>
B-43
<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations
====================================================================
November 2, 1995(a)
Through
NET INVESTMENT INCOME September 30, 1996
--------------------
Income
Dividends (net of foreign withholding
taxes of $54,311).............................. $ 1,662,651
Interest....................................... 480,129
-----------
Total income................................... 2,142,780
-----------
Expenses
Distribution fee--Class A......................... 161,221
Distribution fee--Class B......................... 1,482,118
Distribution fee--Class C......................... 114,523
Management fee.................................... 1,418,805
Transfer agent's fees and expenses................ 377,000
Registration fees................................. 245,000
Reports to shareholders........................... 140,000
Custodian's fees and expenses..................... 112,000
Amortization of deferred organization
expense........................................ 44,589
Legal fees and expenses........................... 42,000
Audit fees and expenses........................... 25,000
Directors' fees................................... 22,500
Miscellaneous..................................... 4,861
-----------
Total expenses................................. 4,189,617
-----------
Net investment loss................................. (2,046,837)
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss on investment transactions........ (9,176,492)
Net unrealized appreciation of investments.......... 36,196,257
-----------
Net gain on investments............................. 27,019,765
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS..................................... $24,972,928
===========
- ----------
(a) Commencement of investment operations.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets
=====================================================================
November 2, 1995(a)
INCREASE (DECREASE) Through
IN NET ASSETS September 30, 1996
--------------------
Operations
Net investment loss............................. $(2,046,837)
Net realized loss on investment
transactions.................................. (9,176,492)
Net unrealized appreciation on
investments................................... 36,196,257
------------
Net increase in net assets resulting from
operations.................................... 24,972,928
------------
Fund share transactions (net of share
conversion) (Note 5)
Net proceeds from shares sold................... 819,026,956
Cost of shares reacquired........................ (149,422,528)
------------
Net increase in net assets from Fund
share transactions............................ 669,604,428
------------
Total increase................................... 694,577,356
NET ASSETS
Beginning of period.............................. 100,000
------------
End of period.................................... $694,677,356
============
- ----------
(a) Commencement of investment operations.
- ---------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL JENNISON GROWTH FUND
================================================================================
Prudential Jennison Growth Fund (the "Series") is a separately managed series of
Prudential Jennison Series Fund, Inc., formerly Prudential Jennison Fund, Inc.
(the "Fund"). The Fund was incorporated in Maryland on August 10, 1995 and is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Series 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 LLC. ("PMF"). Investment operations commenced on November
2, 1995.
The Series' 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
Series 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 Series 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.
Reclassification of Capital Accounts: The Series accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. During the period ended
September 30, 1996, the Series reclassified current net operating losses by
decreasing accumulated net investment loss and decreasing paid-in capital by
$2,046,837. Net investment income, net realized gains, and net assets were not
affected by this change.
Taxes: It is the Series' policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Series' understanding of the applicable country's tax rules and rates.
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 Series commenced investment operations.
- --------------------------------------------------------------------------------
B-45
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL JENNISON GROWTH FUND
================================================================================
NOTE 2. AGREEMENTS
The Fund has a management agreement with PMF. Pursuant to a subadvisory
agreement between PMF and Jennison Associates Capital Corp. ("Jennison"),
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 Series in
accordance with its investment objectives, and policies.
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 Series. PMF pays
Jennison a subadvisory fee at an annual rate of .30 of 1% of the average daily
net assets of the Series 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 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 ended
September 30, 1996. With respect to the Class B and Class C Plans, the Fund
compensates PSI for its distribution-related costs at an annual rate of 1% of
the average daily net assets.
PSI has advised the Series that it has received approximately $909,000 in front-
end sales charges resulting from sales of Class A shares during the period ended
September 30, 1996. From these fees, PSI paid such sales charges to affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PSI has advised the Series that for the period ended September 30, 1996, it
received approximately $350,000 and $10,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PMF, Jennison and PSI are wholly-owned subsidiaries of The Prudential Insurance
Company of America.
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 September
30, 1996, the Fund incurred fees of approximately $312,000 for the services of
PMFS. As of September 30, 1996, approximately $41,000 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 September 30, 1996 were $441,740,023 and $121,903,591,
respectively.
The federal income tax cost basis of the Fund's investments at September
30, 1996, was $589,584,288 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $105,557,386 (gross unrealized
appreciation-$127,649,114; gross unrealized depreciation-$22,091,728).
The Fund will elect to treat net capital losses of approximately $6,706,000
incurred in the eleven month period ended September 30, 1996 as having been
incurred in the following year.
- --------------------------------------------------------------------------------
NOTE 5. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class B shares automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase. A
special exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Effective April
15, 1996 the Fund commenced offering Class Z shares. Class Z shares are not
subject to any sales or redemption charge and are offered for sale to specific
categories of investors.
There are 2.5 billion shares of $.001 par value common stock authorized which
are divided into four classes, designated Class A, Class B, Class C and Class 1,
each of which consists of 1 billion, 500 million, 500 million and 500 million
authorized shares, respectively.
B-46
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL JENNISON GROWTH FUND
================================================================================
Transactions in shares of common stock for the period November 2,1995
(commencement of investment operations) through September 30, 1996 were as
follows:
Class A Shares Amount
- ------- ----------- -------------
Shares sold...................................... 18,039,463 $ 185,913,237
Shares reacquired................................ (10,367,758) (108,741,785)
----------- -------------
Net increase in shares outstanding before
conversion..................................... 7,671,705 77,171,452
Shares issued upon conversion from Class B....... 115,146 1,214,220
----------- -------------
Net increase in shares outstanding............... 7,786,851 $ 78,385,672
=========== =============
Class B
- -------
Shares sold...................................... 23,516,319 $ 240,060,319
Shares reacquired................................ (2,146,698) (22,165,141)
----------- -------------
Net increase in shares outstanding before
conversion...................................... 21,369,621 217,895,178
Shares reacquired upon conversion into
Class A.......................................... (114,531) (1,214,220)
----------- -------------
Net increase in shares outstanding............... 21,255,090 $ 216,680,958
=========== =============
Class C
- -------
Shares sold...................................... 1,610,012 $ 16,355,793
Shares reacquired................................ (210,401) (2,163,259)
----------- -------------
Net increase in shares outstanding............... 1,399,611 $ 14,192,534
=========== =============
Class Z
- -------
April 15,1996(a) through
September 30, 1996
Shares sold...................................... 2,971,624 $ 32,570,435
Shares issued due to merger (Note 6)............. 31,510,396 344,127,172
Shares reacquired................................ (1,464,271) (16,352,343)
----------- -------------
Net increase in shares outstanding............... 33,017,749 $ 360,345,264
=========== =============
(a) Commencement of offering of Class Z shares.
Of the shares outstanding at September 30, 1996, PMF and affiliates owned
5,633,139 shares of the Fund.
- --------------------------------------------------------------------------------
NOTE 6. ACQUISITION OF THE PRUDENTIAL INSTITUTIONAL FUND-GROWTH STOCK FUND
On September 20,1996, the Fund acquired all of the net assets of The Prudential
Institutional Fund-Growth Stock Fund ("Growth Stock Fund") in exchange for Class
Z shares of the Fund pursuant to a plan of reorganization approved by Growth
Stock Fund shareholders on September 6,1996. The acquisition was accomplished by
a tax-free exchange of 31,510,396 Class Z shares of the Fund (valued at
$344,127,172 in the aggregate) for 19,673,729 shares of Growth Stock Fund
outstanding on September 20, 1996. The aggregate net assets of the Fund and
Growth Stock immediately before the acquisition were $347,516,537 and
$344,127,172 (including $72,847,614 of net unrealized appreciation for the
Growth Stock Fund), respectively, thereby resulting in combined net assets of
$691,643,709 immediately after the reorganization.
B-47
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL JENNISON GROWTH FUND
================================================================================
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
------------ ------------ ------------ ------------
November 2, November 2, November 2, April 15,
1995(a) 1995(a) 1995(a) 1996(a)
Through Through Through Through
September 30, September 30, September 30, September 30,
1996(d) 1996(d) 1996(d) 1996(d)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $ 10.00 $ 10.00 $ 10.00 $ 10.32
------- -------- ------- -------
Income from investment operations
Net investment loss..................................... (.03) (.10) (.10) (.02)
Net realized and unrealized gain on investment
transactions......................................... 1.00 .99 .99 .68
------- -------- ------- -------
Total from investment operations..................... .97 .89 .89 .66
------- -------- ------- -------
Net asset value, end of period.......................... $ 10.97 $ 10.89 $ 10.89 $ 10.98
======= ======== ======= =======
TOTAL RETURN(c)......................................... 9.70% 8.90% 8.90% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)......................... $85,440 $231,541 $15,281 $362,416
Average net assets (000)................................ $70,667 $162,412 $12,550 $ 26,829
Ratios to average net assets(b):
Expenses, including distribution fees................ 1.23% 1.98% 1.98% .98%
Expenses, excluding distribution fees................ .98% .98% .98% .98%
Net investment loss.................................. (.37)% (1.12)% (1.12)% (.12)%
Portfolio turnover rate................................. 42% 42% 42% 42%
Average commission rate paid per share.................. $ .0611 $ .0611 $ .0611 $ .0611
</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.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
INDEPENDENT AUDITORS' REPORT PRUDENTIAL JENNISON GROWTH FUND
================================================================================
The Shareholders and Board of Directors
Prudential Jennison Growth Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Jennison Growth Fund as of
September 30, 1996, the related statements of operations and of changes in net
assets, and the financial highlights for the period November 2, 1995
(commencement of investment operations) to September 30, 1996. 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 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 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 securities owned at September 30, 1996 by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles wed 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Jennison
Growth Fund as of September 30, 1996, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated period,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 4,1996
B-49
<PAGE>
Portfolio of Investments as of PRUDENTIAL JENNISON SERIES FUND, INC.
March 31, 1997 (Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--96.2%
COMMON STOCKS--96.2%
- ------------------------------------------------------------
Aerospace/Defense--2.7%
213,800 Boeing Co. $ 21,086,025
- ------------------------------------------------------------
Apparel--0.9%
116,100 NIKE, Inc., Class B 7,198,200
- ------------------------------------------------------------
Banks--2.2%
180,800 Chase Manhattan Corp. 16,927,400
- ------------------------------------------------------------
Beverages--1.6%
375,200 PepsiCo, Inc. 12,240,900
- ------------------------------------------------------------
Brokerage Services--1.5%
192,600 Morgan Stanley Group, Inc. 11,315,250
- ------------------------------------------------------------
Business Services--9.1%
602,425 CUC International, Inc. (a) 13,554,562
377,600 Eagle River Interactive, Inc. (a) 4,059,200
122,100 Federal Express Corp., Class A (a) 6,364,463
363,166 First Data Corp. 12,302,248
161,000 Manpower, Inc. 5,796,000
262,100 Omnicom Group, Inc. 13,072,237
264,500 Reuters Holdings PLC (ADR)
(United Kingdom) 15,390,594
------------
70,539,304
- ------------------------------------------------------------
Cellular Communications--1.2%
208,900 Vodafone Group PLC (ADR) (United
Kingdom) 9,217,713
- ------------------------------------------------------------
Computer Systems/Peripherals--9.5%
187,800 Compaq Computer Corp. (a) 14,390,175
196,100 Dell Computer Corp. (a) 13,261,263
362,300 Hewlett-Packard Co. 19,292,475
81,800 International Business Machines
Corp. $ 11,237,275
336,900 Seagate Technology, Inc. (a) 15,118,387
------------
73,299,575
- ------------------------------------------------------------
EDP Software & Services--6.0%
27,725 Computer Associates International,
Inc. 1,077,809
287,500 Electronic Data Systems Corp. 11,607,813
339,400 Intuit, Inc. (a) 7,891,050
174,700 Microsoft Corp. (a) 16,017,806
181,800 SAP AG (ADR)(Germany) 10,377,817
------------
46,972,295
- ------------------------------------------------------------
Electronic Components--7.3%
177,500 Intel Corp. 24,694,687
610,400 International Rectifier Corp. (a) 7,248,500
412,500 LSI Logic Corp. (a) 14,334,375
139,900 Texas Instruments, Inc. 10,475,013
------------
56,752,575
- ------------------------------------------------------------
Financial Companies--1.7%
193,400 MBNA Corp. 5,391,025
240,300 Schwab (Charles) Corp. 7,659,562
------------
13,050,587
- ------------------------------------------------------------
Health Care Services--2.9%
595,400 Healthsouth Corp. (a) 11,387,025
403,500 PhyCor, Inc. (a) 10,995,375
------------
22,382,400
- ------------------------------------------------------------
Hotels--1.5%
490,600 Hilton Hotels Corp. 11,897,050
- ------------------------------------------------------------
Household & Personal Care Products--4.2%
257,000 Gillette Co. 18,664,625
143,000 Kimberly-Clark Corp. 14,210,625
------------
32,875,250
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
Portfolio of Investments as of PRUDENTIAL JENNISON SERIES FUND, INC.
March 31, 1997 (Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Industrial Technology/Instruments--4.0%
175,600 Applied Materials, Inc. (a) $ 8,143,450
302,300 KLA Instruments Corp. (a) 11,033,950
246,600 Symbol Technologies, Inc. (a) 11,898,450
------------
31,075,850
- ------------------------------------------------------------
Insurance--6.7%
88,100 CIGNA Corp. 12,873,613
217,700 MGIC Investment Corp. 15,402,275
274,433 Mutual Risk Management, Ltd. 9,948,196
183,200 UNUM Corp. 13,373,600
------------
51,597,684
- ------------------------------------------------------------
Machinery--1.3%
197,100 Case Corp. 10,002,825
- ------------------------------------------------------------
Media--4.1%
269,700 Clear Channel Communications, Inc.
(a) 11,563,387
275,300 The Walt Disney Co. 20,096,900
------------
31,660,287
- ------------------------------------------------------------
Networking--3.6%
180,900 Ascend Communications, Inc. (a) 7,371,675
297,500 Cisco Systems, Inc. (a) 14,317,188
187,500 3Com Corp. (a) 6,140,625
------------
27,829,488
- ------------------------------------------------------------
Oil/Petroleum Services--4.2%
161,900 Schlumberger, Ltd. 17,363,775
574,100 Union Pacific Resources Group, Inc. 15,357,175
------------
32,720,950
- ------------------------------------------------------------
Pharmaceuticals--11.6%
186,200 Astra AB Class A (ADR)(Sweden) 8,658,300
236,400 Bristol-Myers Squibb Co. 13,947,600
183,100 Eli Lilly & Co. 15,059,975
224,100 Merck & Co., Inc. 18,880,425
201,600 Pfizer, Inc. $ 16,959,600
236,300 SmithKline Beecham PLC (ADR)
(United Kingdom) 16,541,000
------------
90,046,900
- ------------------------------------------------------------
Retail--3.4%
334,100 Corporate Express, Inc. (a) 3,424,525
356,700 Gap, Inc. 11,949,450
263,000 Kohl's Corp. (a) 11,144,625
------------
26,518,600
- ------------------------------------------------------------
Telecommunications Equipment--5.0%
383,800 Ericsson (L.M.) Telephone Co.,
Inc., Class B (ADR)(Sweden) 12,977,237
258,200 Nokia Corp. (ADR)(Finland) 15,040,150
297,300 Tellabs, Inc. (a) 10,739,963
------------
38,757,350
------------
Total long-term investments
(cost $652,324,301) 745,964,458
------------
<CAPTION>
Principal
Moody's Amount
Rating (000)
<S> <C> <C> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT--3.0%
Commercial Paper--3.0%
P1 $ 23,102 Chevron Oil Finance Co.,
6.00%, 4/1/97
(cost $23,102,000) 23,102,000
- ------------------------------------------------------------
Total Investments--99.2%
(cost $675,426,301; Note 4) 769,066,458
Other assets in excess of
liabilities--0.8% 6,022,219
------------
Net Assets--100% $775,088,677
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-51
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL JENNISON SERIES FUND, INC.
(Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets March 31, 1997
<S> <C>
Investments, at value (cost $675,426,301).................................................................. $769,066,458
Cash....................................................................................................... 534,960
Receivable for investments sold............................................................................ 8,950,514
Receivable for Fund shares sold............................................................................ 5,051,093
Dividends and interest receivable.......................................................................... 1,039,458
Deferred expenses and other assets......................................................................... 148,765
--------------
Total assets............................................................................................ 784,791,248
--------------
Liabilities
Payable for Fund shares reacquired......................................................................... 5,213,573
Payable for investments purchased.......................................................................... 3,555,554
Management fee payable..................................................................................... 416,198
Distribution fees payable.................................................................................. 268,678
Accrued expenses and other liabilities..................................................................... 248,568
--------------
Total liabilities....................................................................................... 9,702,571
--------------
Net Assets................................................................................................. $775,088,677
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 69,630
Paid-in capital in excess of par........................................................................ 666,189,317
--------------
666,258,947
Accumulated net investment loss......................................................................... (1,465,766)
Accumulated net realized gain on investments............................................................ 16,656,828
Net unrealized appreciation on investments.............................................................. 93,638,668
--------------
Net assets, March 31, 1997................................................................................. $775,088,677
--------------
--------------
Class A:
Net asset value and redemption price per share
($90,708,484 / 8,126,760 shares of common stock issued and outstanding).............................. $11.16
Maximum sales charge (5% of offering price)............................................................. .59
--------------
Maximum offering price to public........................................................................ $11.75
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($261,734,453 / 23,698,391 shares of common stock issued and outstanding)............................ $11.04
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($15,875,241 / 1,437,412 shares of common stock issued and outstanding).............................. $11.04
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($406,770,499 / 36,367,014 shares of common stock issued and outstanding)............................ $11.19
--------------
--------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Six Months
Ended
Net Investment Income March 31, 1997
Income
Dividends (net of foreign witholding
taxes of $91,824)..................... $ 2,882,371
Interest................................. 391,840
--------------
Total income.......................... 3,274,211
--------------
Expenses
Distribution fee--Class A................ 116,749
Distribution fee--Class B................ 1,297,945
Distribution fee--Class C................ 81,275
Management fee........................... 2,311,209
Transfer agent's fees and expenses....... 612,000
Custodian's fees and expenses............ 74,000
Reports to shareholders.................. 73,000
Legal fees and expenses.................. 65,000
Registration fees........................ 54,000
Amortization of deferred organization
expense............................... 18,932
Audit fees and expenses.................. 17,500
Directors' fees.......................... 5,600
Miscellaneous............................ 12,767
--------------
Total expenses........................ 4,739,977
--------------
Net investment loss......................... (1,465,766)
--------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment
transactions............................. 25,833,320
Net change in unrealized appreciation on
investments.............................. (15,405,203)
--------------
Net gain on investments..................... 10,428,117
--------------
Net Increase in Net Assets
Resulting from Operations................... $ 8,962,351
--------------
--------------
</TABLE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months November 2, 1995(a)
Ended Through
Increase (Decrease) March 31, September 30,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment loss...... $ (1,465,766) $ (2,046,837)
Net realized gain (loss)
on investments........ 25,833,320 (9,176,492)
Net change in unrealized
appreciation on
investments........... (15,405,203) 36,196,257
------------ --------------------
Net increase in net
assets resulting from
operations............ 8,962,351 24,972,928
------------ --------------------
Fund share transactions (net
of share conversion)
(Note 5)
Net proceeds from shares
sold.................. 377,247,065 819,026,956
Cost of shares
reacquired............ (305,798,095) (149,422,528)
------------ --------------------
Net increase in net
assets from Fund share
transactions.......... 71,448,970 669,604,428
------------ --------------------
Total increase.............. 80,411,321 694,577,356
Net Assets
Beginning of period......... 694,677,356 100,000
------------ --------------------
End of period............... $775,088,677 $694,677,356
------------ --------------------
------------ --------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
Prudential Jennison Growth Fund (the 'Series') is a separately managed series of
Prudential Jennison Series Fund, Inc., formerly Prudential Jennison Fund, Inc.
(the 'Fund'). The Fund was incorporated in Maryland on August 10, 1995 and is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Series 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
Investments Fund Management LLC ('PIFM'). Investment operations commenced on
November 2, 1995.
The Series' 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
Series 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 Series 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 Series' policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Series' understanding of the applicable country's tax rules and rates.
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
Series commenced investment operations.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to a subadvisory agreement between PIFM and Jennison
Associates Capital Corp. ('Jennison'), Jennison furnishes investment advisory
services in connection with the management of the Fund. Under the subadvisory
agreement, Jennison, subject to the supervision of PIFM, is responsible for
managing the assets of the Series in accordance with its investment objectives
and policies.
The management fee paid PIFM will be computed daily and payable monthly, at an
annual rate of .60 of 1% of the average daily net assets of the Series. PIFM
pays Jennison a subadvisory fee at an annual rate of .30
- --------------------------------------------------------------------------------
B-54
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- -------------------------------------------------------------------------------
of 1% of the average daily net assets of the Series up to and including $300
million and .25 of 1% of such assets in excess of $300 million. PIFM 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. The Fund compensates PSI for distributing and servicing the
Fund's Class A, Class B and Class C shares, pursuant to plans of distribution,
(the 'Class A, B and C Plans'), regardless of expenses actually incurred by PSI.
The distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
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 six
months ended March 31, 1997. With respect to the Class B and Class C Plans, the
Fund compensates PSI for its distribution-related costs at an annual rate of 1%
of the average daily net assets.
PSI has advised the Series that it has received approximately $222,000 in
front-end sales charges resulting from sales of Class A shares during the six
months ended March 31, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Series that for the six months ended March 31, 1997, it
received approximately $340,200 and $3,700 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PIFM, Jennison and PSI are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$220,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of March 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended March 31, 1997,
the Fund incurred fees of approximately $561,000 for the services of PMFS. As of
March 31, 1997, approximately $102,000 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. For the six months ended March
31, 1997, PSI earned approximately $13,700 in brokerage commissions from
portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended March 31, 1997 were $299,397,926 and $252,265,431,
respectively.
The cost of investments for federal income tax purposes at March 31, 1997, was
$676,579,610 and, accordingly, net unrealized appreciation of investments for
federal income tax purposes was $92,486,848 (gross unrealized
appreciation--$120,278,587; gross unrealized depreciation--$27,791,739).
The Fund will elect to treat net capital losses of approximately $6,706,000
incurred in the eleven month period ended September 30, 1996 as having been
incurred in the current year.
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class B shares automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase. A
special exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class Z shares are
not subject to any sales or redemption charge and are offered for sale to
specific categories of investors.
- -------------------------------------------------------------------------------
B-55
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Notes to Financial Statements (Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
There are 2.5 billion shares of $.001 par value common stock authorized which
are 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. Of the shares outstanding at March 31, 1997,
PIFM and affiliates owned 5,673,139 shares of the Fund.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Six months ended March 31, 1997
Shares sold........................ 11,073,129 $ 128,555,705
Shares reacquired.................. (10,883,765) (125,746,338)
----------- -------------
Net increase in shares outstanding
before conversion................ 189,364 2,809,367
Shares issued upon conversion from
Class B.......................... 147,211 1,709,025
----------- -------------
Net increase in shares
outstanding...................... 336,575 $ 4,518,392
----------- -------------
----------- -------------
November 2, 1995(a) through
September 30, 1996
Shares sold........................ 18,039,463 $ 185,913,237
Shares reacquired.................. (10,367,758) (108,741,785)
----------- -------------
Net increase in shares outstanding
before conversion................ 7,671,705 77,171,452
Shares issued upon conversion from
Class B.......................... 115,146 1,214,220
----------- -------------
Net increase in shares
outstanding...................... 7,786,851 $ 78,385,672
----------- -------------
----------- -------------
Class B
- -----------------------------------
Six months ended March 31, 1997
Shares sold........................ 4,731,001 $ 54,455,762
Shares reacquired.................. (2,142,402) (24,662,538)
----------- -------------
Net increase in shares outstanding
before conversion................ 2,588,599 29,793,224
Shares reacquired upon conversion
into Class A..................... (148,631) (1,709,025)
----------- -------------
Net increase in shares
outstanding...................... 2,439,968 $ 28,084,199
----------- -------------
----------- -------------
November 2, 1995(a) through
September 30, 1996
Shares sold........................ 23,516,319 $ 240,060,319
Shares reacquired.................. (2,146,698) (22,165,141)
----------- -------------
Net increase in shares outstanding
before conversion................ 21,369,621 217,895,178
Shares reacquired upon conversion
into Class A..................... (114,531) (1,214,220)
----------- -------------
Net increase in shares
outstanding...................... 21,255,090 $ 216,680,958
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Six months ended March 31, 1997
Shares sold........................ 188,332 $ 2,168,599
Shares reacquired.................. (153,864) (1,764,916)
----------- -------------
Net increase in shares
outstanding...................... 34,468 $ 403,683
----------- -------------
----------- -------------
November 2, 1995(a) through
September 30, 1996
Shares sold........................ 1,610,012 $ 16,355,793
Shares reacquired.................. (210,401) (2,163,259)
----------- -------------
Net increase in shares
outstanding...................... 1,399,611 $ 14,192,534
----------- -------------
----------- -------------
Class Z
- -----------------------------------
Six months ended March 31, 1997
Shares sold........................ 16,557,646 $ 192,066,999
Shares reacquired.................. (13,208,381) (153,624,303)
----------- -------------
Net increase in shares
outstanding...................... 3,349,265 $ 38,442,696
----------- -------------
----------- -------------
April 15, 1996(a) through
September 30, 1996
Shares sold........................ 2,971,624 $ 32,570,435
Shares issued due to acquisition of
fund............................. 31,510,396 344,127,172
Shares reacquired.................. (1,464,271) (16,352,343)
----------- -------------
Net increase in shares
outstanding...................... 33,017,749 $ 360,345,264
----------- -------------
----------- -------------
</TABLE>
(a) Commencement of investment operations.
- -------------------------------------------------------------------------------
B-56
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Financial Highlights (Unaudited) PRUDENTIAL JENNISON GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
--------------------------- --------------------------- --------------------------
Six November 2, Six November 2, Six November 2,
Months 1995(a) Months 1995(a) Months 1995(a)
Ended Through Ended Through Ended Through
March 31, September 30, March 31, September 30, March 31, September 30,
1997(d) 1996(d) 1997(d) 1996(d) 1997(d) 1996(d)
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................... $ 10.97 $ 10.00 $ 10.89 $ 10.00 $ 10.89 $ 10.00
--------- ------ --------- ------------- --------- ------
Income from investment operations
Net investment loss................. (.01) (.03) (.06 ) (.10) (.06) (.10)
Net realized and unrealized gain on
investment transactions.......... .20 1.00 .21 .99 .21 .99
--------- ------ --------- ------------- --------- ------
Total from investment
operations.................... .19 .97 .15 .89 .15 .89
--------- ------ --------- ------------- --------- ------
Net asset value, end of period...... $ 11.16 $ 10.97 $ 11.04 $ 10.89 $ 11.04 $ 10.89
--------- ------ --------- ------------- --------- ------
--------- ------ --------- ------------- --------- ------
TOTAL RETURN(c)..................... 1.73% 9.70% 1.38 % 8.90% 1.38% 8.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..... $90,708 $85,440 $261,734 $ 231,541 $15,875 $15,281
Average net assets (000)............ $93,656 $70,667 $260,302 $ 162,412 $16,300 $12,550
Ratios to average net assets(b):
Expenses, including distribution
fees.......................... 1.09% 1.23% 1.84 % 1.98% 1.84% 1.98%
Expenses, excluding distribution
fees.......................... .84% .98% .84 % .98% .84% .98%
Net investment income (loss)..... (.24)% (.37)% (.99 )% (1.12)% (.99)% (1.12)%
Portfolio turnover rate............. 34% 42% 34 % 42% 34% 42%
Average commission rate paid per
share............................ $ .0598 $ .0611 $ .0598 $ .0611 $ .0598 $ .0611
<CAPTION>
Class Z
---------------------------
Six April 15,
Months 1996(a)
Ended Through
March 31, September 30,
1997(d) 1996(d)
--------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................... $ 10.98 $ 10.32
--------- -------------
Income from investment operations
Net investment loss................. -- (.02)
Net realized and unrealized gain on
investment transactions.......... .21 .68
--------- -------------
Total from investment
operations.................... .21 .66
--------- -------------
Net asset value, end of period...... $ 11.19 $ 10.98
--------- -------------
--------- -------------
TOTAL RETURN(c)..................... 1.91 % 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..... $406,770 $ 362,416
Average net assets (000)............ $402,262 $ 26,829
Ratios to average net assets(b):
Expenses, including distribution
fees.......................... .84 % .98%
Expenses, excluding distribution
fees.......................... .84 % .98%
Net investment income (loss)..... .01 % (.12)%
Portfolio turnover rate............. 34 % 42%
Average commission rate paid per
share............................ $ .0598 $ .0611
</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.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
Portfolio of Investments as of PRUDENTIAL JENNISON SERIES FUND, INC.
March 31, 1997 PRUDENTIAL JENNISON GROWTH &
(Unaudited) INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--81.0%
COMMON STOCKS--81.0%
- ------------------------------------------------------------
Aerospace/Defense--2.6%
4,400 Boeing Co. $ 433,950
34,600 General Motors Corp., Class H 1,877,050
------------
2,311,000
- ------------------------------------------------------------
Airlines--2.5%
26,300 Delta Airlines, Inc. 2,212,487
- ------------------------------------------------------------
Aluminum--2.4%
34,300 Reynolds Metals Co. 2,126,600
- ------------------------------------------------------------
Automobiles & Trucks--3.2%
50,200 General Motors Corp. 2,779,825
- ------------------------------------------------------------
Banking--4.5%
11,700 Chase Manhattan Corp. 1,095,412
19,100 Fleet Financial Group, Inc. 1,093,475
136,600 Hibernia Corp., Class A 1,792,875
------------
3,981,762
- ------------------------------------------------------------
Building & Related Industries--0.8%
15,800 York International Corp. 661,625
- ------------------------------------------------------------
Business Services--4.0%
38,500 CUC International, Inc. (a) 866,250
21,800 Manpower, Inc. 784,800
63,000 Ryder System, Inc. 1,842,750
------------
3,493,800
- ------------------------------------------------------------
Cellular Communications--0.7%
13,300 Vodafone Group PLC (ADR) (United
Kingdom) 586,863
Commercial Services--1.5%
64,300 Ogden Corp. $ 1,358,338
- ------------------------------------------------------------
Computer Systems/Peripherals--5.5%
22,300 Hewlett-Packard Co. 1,187,475
92,400 Intergraph Corp. (a) 716,100
16,400 International Business Machines
Corp. 2,252,950
107,400 Unisys Corp. (a) 684,675
------------
4,841,200
- ------------------------------------------------------------
Electrical Equipment--2.5%
124,700 Westinghouse Electric Corp. 2,213,425
- ------------------------------------------------------------
Hotels--1.2%
42,300 Hilton Hotels Corp. 1,025,775
- ------------------------------------------------------------
Industrial Technology/Instruments--2.8%
38,600 Millipore Corp. 1,635,675
17,100 Symbol Technologies, Inc. (a) 825,075
------------
2,460,750
- ------------------------------------------------------------
Insurance--4.0%
24,200 CIGNA Corp. 3,536,225
- ------------------------------------------------------------
Machinery--1.9%
17,200 Case Corp. 872,900
10,000 Caterpillar, Inc. 802,500
------------
1,675,400
- ------------------------------------------------------------
Manufacturing--0.8%
19,200 Kennametal, Inc. 696,000
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Portfolio of Investments as of PRUDENTIAL JENNISON SERIES FUND, INC.
March 31, 1997 PRUDENTIAL JENNISON GROWTH &
(Unaudited) INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Mining--3.4%
33,300 Asarco, Inc. $ 936,562
54,300 Newmont Mining Corp. 2,104,125
------------
3,040,687
- ------------------------------------------------------------
Office Equipment & Supplies--1.3%
20,900 Xerox Corp. 1,188,688
- ------------------------------------------------------------
Oil/Petroleum Services--9.1%
29,200 Amerada Hess Corp. 1,547,600
30,700 Anadarko Petroleum Corp. 1,723,037
72,600 Dresser Industries, Inc. 2,196,150
67,400 Union Pacific Resources Group, Inc. 1,802,950
28,500 YPF Sociedad Anonima (ADR)
(Argentina) 755,250
------------
8,024,987
- ------------------------------------------------------------
Paper & Forest Products--2.7%
42,100 Boise Cascade Corp. 1,284,050
24,100 Champion International Corp. 1,096,550
------------
2,380,600
- ------------------------------------------------------------
Pharmaceuticals--2.7%
37,600 Pharmacia & Upjohn, Inc. 1,377,100
5,300 Smithkline Beecham PLC (ADR)
(United Kingdom) 371,000
15,100 Vertex Pharmaceuticals, Inc. (a) 611,550
------------
2,359,650
- ------------------------------------------------------------
Publishing--7.5%
40,800 American Greetings Corp., Class A 1,303,050
36,500 McGraw-Hill Companies, Inc. 1,866,062
37,100 New York Times Co., Class A $ 1,637,038
43,700 Tribune Co. 1,769,850
------------
6,576,000
- ------------------------------------------------------------
Railroads--0.6%
9,700 Union Pacific Corp. 550,475
- ------------------------------------------------------------
Retail--2.3%
112,500 The Limited, Inc. 2,067,188
- ------------------------------------------------------------
Specialty Chemicals--7.2%
21,800 Betzdearborn, Inc. 1,376,125
49,500 Dexter Corp. 1,491,187
89,800 Engelhard Corp. 1,885,800
20,200 Minerals Technologies, Inc. 671,650
20,900 Morton International, Inc. 883,025
------------
6,307,787
- ------------------------------------------------------------
Steel & Metals--2.3%
76,600 J & L Specialty Steel, Inc. 919,200
42,100 USX-U.S. Steel Group, Inc. 1,120,913
------------
2,040,113
- ------------------------------------------------------------
Telecommunications--1.0%
24,600 MCI Communications Corp. 876,375
------------
Total long-term investments
(cost $70,500,723) 71,373,625
------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
Portfolio of Investments as of PRUDENTIAL JENNISON SERIES FUND, INC.
March 31, 1997 PRUDENTIAL JENNISON GROWTH &
(Unaudited) INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--19.1%
COMMERCIAL PAPER--8.9%
P1 $ 2,279 Chevron Oil Finance
Co.,
6.00%, 4/1/97 $ 2,279,000
A1 4,094 Ford Motor Credit Co.,
5.50%, 4/11/97 4,094,000
Aaa 1,500 General Electric
Capital Corp.,
5.53%, 4/18/97 1,500,000
------------
Total commercial paper
(cost $7,873,000) 7,873,000
------------
U.S. GOVERNMENT SECURITIES--10.2%
United States Treasury
Bills
8,000(b) 4.94%, 4/3/97 7,997,805
1,000 5.20%, 4/3/97 999,711
------------
Total U.S. government
securities
(cost $8,997,516) 8,997,516
------------
Total short-term
investments
(cost $16,870,516) 16,870,516
------------
- ------------------------------------------------------------
Total investments before short sales--100.1%
(cost $87,371,239; Note 4) 88,244,141
------------
COMMON STOCKS SOLD SHORT(a)--(3.7%)
- ------------------------------------------------------------
Beverages--(1.1%)
(18,400) Coca-Cola Co. $ (1,025,800)
- ------------------------------------------------------------
Electrical Equipment--(1.2%)
(10,400) General Electric Co. (1,032,200)
- ------------------------------------------------------------
Household & Personal Care Products--(1.4%)
(10,700) Procter & Gamble Co. (1,227,825)
------------
Total common stocks
sold short (proceeds
at cost $3,503,413) (3,285,825)
------------
- -------------------------------------------------
Total investments, net of short sales--96.4% 84,958,316
Other assets in excess
of liabilities--3.6% 3,192,442
------------
Net Assets--100% $ 88,150,758
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) $3,500,000 of principal amount pledged as collateral for short sales.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
PRUDENTIAL JENNNISON SERIES FUND, INC.
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH &
(Unaudited) INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets March 31, 1997
<S> <C>
Investments, at value (cost $87,371,239)................................................................... $ 88,244,141
Deposits with broker for securities sold short............................................................. 3,503,413
Receivable for Fund shares sold............................................................................ 793,178
Receivable for investments sold............................................................................ 792,275
Dividends and interest receivable.......................................................................... 106,324
Deferred expenses and other assets......................................................................... 75,690
--------------
Total assets............................................................................................ 93,515,021
--------------
Liabilities
Investments sold short, at value (proceeds $3,503,413)..................................................... 3,285,825
Payable for investments purchased.......................................................................... 1,396,025
Payable for Fund shares reacquired......................................................................... 448,482
Accrued expenses and other liabilities..................................................................... 129,319
Distribution fees payable.................................................................................. 59,440
Management fee payable..................................................................................... 45,172
--------------
Total liabilities....................................................................................... 5,364,263
--------------
Net Assets................................................................................................. $ 88,150,758
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 8,451
Paid-in capital in excess of par........................................................................ 85,846,137
--------------
85,854,588
Undistributed net investment income..................................................................... 6,251
Accumulated net realized gain on investments............................................................ 1,199,429
Net unrealized appreciation on investments and short sales.............................................. 1,090,490
--------------
Net assets, March 31, 1997................................................................................. $ 88,150,758
--------------
--------------
Class A:
Net asset value and redemption price per share
($23,820,383 / 2,280,786 shares of common stock issued and outstanding).............................. $10.44
Maximum sales charge (5.0% of offering price)........................................................... .55
--------------
Maximum offering price to public........................................................................ $10.99
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($58,722,132 / 5,632,560 shares of common stock issued and outstanding).............................. $10.43
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($5,445,098 / 522,306 shares of common stock issued and outstanding.................................. $10.43
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($163,145 / 15,573 shares of common stock issued and outstanding..................................... $10.48
--------------
--------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
Statement of Operations (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 7, 1996(a)
Through
Net Investment Income March 31, 1997
<S> <C>
Income
Dividends (net of foreign
withholding taxes of $1,026)..... $ 435,538
Interest and discount earned........ 381,888
-----------
Total income..................... 817,426
-----------
Expenses
Distribution fee--Class A........... 22,769
Distribution fee--Class B........... 192,287
Distribution fee--Class C........... 19,963
Management fee...................... 182,116
Registration fees................... 68,000
Transfer agent's fees and
expenses......................... 47,000
Legal fees and expenses............. 47,000
Reports to shareholders............. 44,000
Custodian's fees and expenses....... 35,000
Audit fees and expenses............. 11,000
Directors' fees..................... 5,000
Miscellaneous....................... 1,603
-----------
Total expenses................... 675,738
-----------
Net investment income.................. 141,688
-----------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions........................ 1,199,429
-----------
Net unrealized appreciation on:
Investments......................... 872,902
Short sales......................... 217,588
-----------
1,090,490
-----------
Net gain on investments................ 2,289,919
-----------
Net Increase in Net Assets Resulting
from Operations........................ $2,431,607
-----------
-----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
November 7, 1996(a)
Increase (Decrease) Through
in Net Assets March 31, 1997
<S> <C>
Operations
Net investment income............... $ 141,688
Net realized gain on investments.... 1,199,429
Net unrealized appreciation of
investments...................... 1,090,490
--------------------
Net increase in net assets resulting
from operations.................. 2,431,607
--------------------
Dividends from net investment income
Class A............................. (59,278)
Class B............................. (68,648)
Class C............................. (7,510)
Class Z............................. (1)
--------------------
(135,437)
--------------------
Fund share transactions (net of share
conversion) (Note 5)
Net proceeds from shares sold....... 93,572,144
Net asset value of shares issued in
reinvestment of dividends and
distributions.................... 124,907
Cost of shares reacquired........... (7,842,563)
--------------------
Net increase in net assets from Fund
share transactions............... 85,854,488
--------------------
Total increase......................... 88,150,658
Net Assets
Beginning of period.................... 100
--------------------
End of period.......................... $ 88,150,758
--------------------
--------------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Notes to Financial Statements (Unaudited) INCOME FUND
- --------------------------------------------------------------------------------
Prudential Jennison Growth & Income Fund (the 'Series') is a separately managed
series of Prudential Jennison Series Fund, Inc., formerly Prudential Jennison
Fund, Inc. (the 'Fund'). The Fund was incorporated in Maryland on August 10,
1995 and is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. Investment operations
commenced on November 7, 1996.
The Series' investment objective is to achieve long-term growth of capital and
income, with current income as a secondary objective. The Series seeks to
achieve its objectives by investing primarily in common stocks of established
companies with growth prospects believed to be underappreciated by the market.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Series in the preparation of its financial statements.
Securities 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, 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.
Short Sales: The Series may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at termination is less than or greater than, respectively, the proceeds
originally received.
Dividends and Distributions: The Series 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 Series' policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Series' understanding of the applicable country's tax rules and rates.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to a subadvisory agreement
- --------------------------------------------------------------------------------
B-63
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Notes to Financial Statements (Unaudited) INCOME FUND
- --------------------------------------------------------------------------------
between PIFM and Jennison Associates Capital Corp. ('Jennison'), Jennison
furnishes investment advisory services in connection with the management of the
Fund. Under the subadvisory agreement, Jennison, subject to the supervision of
PIFM, is responsible for managing the assets of the Series in accordance with
its investment objectives, and policies.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .60 of 1% of the average daily net assets of the Series. PIFM pays
Jennison a subadvisory fee at an annual rate of .30 of 1% of the average daily
net assets of the Series up to and including $300 million and .25 of 1% of such
assets in excess of $300 million. PIFM 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 of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the 'Class A, B and C Plans') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
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
period ended March 31, 1997. With respect to the Class B and Class C Plans, the
Fund compensates PSI for its distribution-related costs at an annual rate of 1%
of the average daily net assets.
PSI has advised the Series that it has received approximately $71,000 in
front-end sales charges resulting from sales of Class A shares during the period
ended March 31, 1997. From these fees, PSI paid such sales charges to affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
PSI has advised the Series that for the period ended March 31, 1997, it received
approximately $35,000 and $600 in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders, respectively.
PIFM, Jennison and PSI are wholly-owned subsidiaries of The Prudential Insurance
Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of March 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the period ended March 31, 1997, the
Fund incurred fees of approximately $25,000 for the services of PMFS. As of
March 31, 1997, approximately $8,000 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. For the period ended March 31,
1997, PSI earned approximately $139,200 in brokerage commissions from portfolio
transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended March 31, 1997 were $83,126,562 and $13,825,267,
respectively.
The cost basis of the investments for federal income tax purposes at March 31
1997, was $87,381,146 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $862,995 (gross unrealized
appreciation-$3,448,098; gross unrealized depreciation--$2,585,103).
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5%
- --------------------------------------------------------------------------------
B-64
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Notes to Financial Statements (Unaudited) INCOME FUND
- --------------------------------------------------------------------------------
to zero depending on the period of time the shares are held. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
C shares are sold with a contingent deferred sales charge of 1% during the first
year. Class Z shares are not subject to any sales or redemption charge and are
offered exclusively for sale to a limited group of investors.
There are 1.25 billion shares of $.001 par value common stock authorized which
are divided into four classes, designated Class A, Class B, Class C and Class Z,
each of which consists of 500 million, 250 million, 250 million and 250 million
authorized shares, respectively.
Transactions in shares of common stock for the period November 7, 1996
(commencement of investment operations) through March 31, 1997 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------------- ---------- -----------
<S> <C> <C>
Shares sold........................... 2,706,866 $27,486,098
Shares issued in reinvestment of
dividends........................... 5,230 54,030
Shares reacquired..................... (431,435) (4,592,257)
---------- -----------
Net increase in shares outstanding
before conversion................... 2,280,661 22,947,871
Shares issued upon conversion from
Class B............................. 125 1,354
---------- -----------
Net increase in shares outstanding.... 2,280,786 $22,949,225
---------- -----------
---------- -----------
<CAPTION>
Class B Shares Amount
- -------------------------------------- ---------- -----------
<S> <C> <C>
Shares sold........................... 5,918,529 $60,487,397
Shares issued in reinvestment of
dividends........................... 6,162 63,653
Shares reacquired..................... (292,006) (3,084,972)
---------- -----------
Net increase in shares outstanding
before conversion................... 5,632,685 57,466,078
Shares reacquired upon conversion into
Class A............................. (125) (1,354)
---------- -----------
Net increase in shares outstanding.... 5,632,560 $57,464,724
---------- -----------
---------- -----------
Class C
- --------------------------------------
Shares sold........................... 527,092 $ 5,317,946
Shares issued in reinvestment of
dividends........................... 699 7,224
Shares reacquired..................... (5,485) (56,689)
---------- -----------
Net increase in shares outstanding.... 522,306 $ 5,268,481
---------- -----------
---------- -----------
Class Z
- --------------------------------------
Shares sold........................... 25,959 $ 280,703
Shares reacquired..................... (10,386) (108,645)
---------- -----------
Net increase in shares outstanding.... 15,573 $ 172,058
---------- -----------
---------- -----------
</TABLE>
- -------------------------------------------------------------------------------
B-65
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
PRUDENTIAL JENNISON GROWTH &
Financial Highlights (Unaudited) INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
November 7, November 7, November 7, November 7,
1996(a) 1996(a) 1996(a) 1996(a)
Through Through Through Through
March 31, March 31, March 31, March 31,
1997 1997 1997 1997
------------ ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................ $ 10.00 $ 10.00 $ 10.00 $ 10.00
------ ------------ ------ ------------
Income from investment operations
Net investment income............................... .04 .01 .01 .05
Net realized and unrealized gain on investment
transactions..................................... .43 .44 .44 .46
------ ------------ ------ ------------
Total from investment operations................. .47 .45 .45 .51
------ ------------ ------ ------------
Less distributions
Dividends from net investment income................ (.03) (.02) (.02) (.03)
------ ------------ ------ ------------
Net asset value, end of period...................... $ 10.44 $ 10.43 $ 10.43 $ 10.48
------ ------------ ------ ------------
------ ------------ ------ ------------
TOTAL RETURN(c)..................................... 4.47% 4.16% 4.16% 4.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)..................... $ 23,820 $ 58,722 $ 5,445 $ 163
Average net assets (000)............................ $ 23,085 $ 48,739 $ 5,060 $ 51
Ratios to average net assets(b):
Expenses, including distribution fees............ 1.70% 2.45% 2.45% 1.45%
Expenses, excluding distribution fees............ 1.45% 1.45% 1.45% 1.45%
Net investment income............................ .99% .24% .24% 1.24%
Portfolio turnover rate............................. 23% 23% 23% 23%
Average commission rate paid per share.............. $ .0553 $ .0553 $ .0553 $ .0553
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." 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 such issues.
Aa: Bonds which are 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 the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are 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 which are 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 which are 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company 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 company ranks in the
lower end of its generic rating category.
Caa: Bonds which are 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 which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than in higher-rated categories.
BB, B, CCC AND CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of speculation
and CC the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but 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.
A-2
<PAGE>
B: Below investment grade and possessing 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.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: 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.
SHORT-TERM DEBT RATINGS
DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-3
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
(CHART)
Value of $1,000 invested on 1/1/26 through 12/31/96
Stocks (S&P 500) - $1,370,946
U.S. (Long-Term) Treasury Bonds - $33,727
U.S. (30 day) Treasury Bills - $13,538
U.S. Inflation - $8,870
Source for investment return: Prudential investment Corporation
based on data from Ibbotson Associates' EnCorr Software, Chicago,
IL. Used with permission. All rights reserved. This example is for
illustrative purposes only and is not intended to represent the
past, present or future performance of the Prudential Jennison
Growth & Income 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 and, if held to maturity,
offer both a fixed principal value and fixed rate of return. Common
stock total return is based on the Standard & Poor's 500 Index, a
market-value weighted index made up of 500 of the largest stocks in
the U.S. based upon their stock market value. Long-term government
bonds are represented by the annual total returns of a series of
20-year government bonds. U.S. Treasury bills are represented by
the annual total returns of a series of short-term Treasury bills.
Inflation is measured by the Consumer Price Index (CPI). Investors
cannot buy or invest directly in market indices or averages. Not
all investments are suitable for all investors. Past performance is
not indicative of future results.
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 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 Funds or of
any sector in which the Funds invest.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in 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.
<TABLE>
<CAPTION>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds..... 2.0% 7.0% 14.4 % 8.5 % 15.3% 7.2% 10.7% (3.4)% 18.4%
Mortgage Securities..... 4.3% 8.7% 15.4 % 10.7 % 15.7% 7.0% 6.8% (1.6)% 16.8%
U.S. Corporate Bonds.... 2.6% 9.2% 14.1 % 7.1 % 18.5% 8.7% 12.2% (3.9)% 22.3%
U.S. High Yield Corpo-
rate Bonds............. 5.0% 12.5% 0.8 % (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
World Government Bonds.. 35.2% 2.3% (3.4)% 15.3 % 16.2% 4.8% 15.1% 6.0 % 19.6%
Difference between
highest and lowest
return in percent...... 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
- -------
/1/Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment
markets for the period from 1986 made in the stocks representing
through 1995. It does not the S&P 500 stock index with and
represent the performance of any without reinvested dividends.
Prudential Mutual Fund.
(CHART)
(CHART)
Hong Kong - 23.8% Capital Appreciation and Reinvesting
Belgium - 20.7% Dividends - $186,208
Sweden - 19.4% Capital Appreciation Only - $66,913
Netherlands - 19.3%
Spain - 17.9%
Switzerland - 17.1%
France - 15.3%
U.K. - 15.0%
U.S. - 14.8%
Japan - 12.8%
Austria - 10.9%
Germany - 10.7%
Source: Morgan Stanley Capital Source: Stocks, Bonds, Bills, and
International (MSCI) Used with Inflation 1996 Yearbook, Ibbotson
permission. Morgan Stanley Country Associates, Chicago (annually
indices are unmanaged indices updates work by Roger G. Ibbotson
which include those stocks making and Rex A. Sinquefield). Used with
up the largest two-thirds of each permission. All rights reserved.
country's total stock market This chart is used for
capitalization. Returns reflect illustrative purposes only and is
the reinvestment of all not intended to represent the
distributions. This chart is for past, present or future
illustrative purposes only and is performance of any Prudential
not indicative of the past, Mutual Fund. Common stock total
present or future performance of return is based on the Standard &
any specific investment. Investors Poor's 500 Stock Index, a market-
cannot invest directly in stock value-weighted index made up of
indices. 500 of the largest stocks in the
U.S. based upon their stock market
value. Investors cannot invest
directly in indices.
(CHART)
World Total: $9.2 Trillion
Canada - 2.2%
U.S. - 40.8%
Pacific Basin - 28.7%
Europe - 28.3%
Source: Morgan Stanley Capital
International, December 1995. Used
with permission. This chart represents
the capitalization of major world
stock markets as measured by the
Morgan Stanley Capital International
(MSCI) World Index. The total market
capitalization is based on the value
of 1579 companies in 22 countries
(representing approximately 60% of the
aggregate market value of the stock
exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
I-3
<PAGE>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
(CHART)
- -------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1995.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
I-4
<PAGE>
The following chart, although not relevant to share ownership in a 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)
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK &
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
S&P 500 EAFE Lehman Aggregate
37.6% 69.9% 32.6%
-7.2% -23.2% -2.9%
Best Returns Zone
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
- -------
*Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (LANA). Past performance is not indicative of
future results. The S&P 500 Index is a weighted, unmanaged index comprised of
500 stocks which provides a broad indication of stock price movements. The
Morgan Stanley EAFE Index is an unmanaged index comprised of 20 overseas stock
markets in Europe, Australia, New Zealand and the Far East. The Lehman
Aggregate Index includes all publicly-issued investment grade debt with
maturities over one year, including U.S. government and agency issues, 15 and
30 year fixed-rate government agency mortgage securities, dollar denominated
SEC registered corporate and government securities, as well as asset-backed
securities. Investors cannot invest directly in stock or bond market indices.
I-5
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Funds are Managed--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 either Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1995. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs
for employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs more than 92,000 persons worldwide, and maintains a
sales force of approximately 13,000 agents and 5,600 financial advisors.
Prudential is a major issuer of annuities, including variable annuities.
Prudential seeks to develop innovative products and services to meet consumer
needs in each of its business areas. Prudential uses the Rock of Gibraltar as
its symbol. The Prudential rock is a recognized brand name throughout the
world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($11.4 billion) of any life insurance
company in the United States. Prudential provides auto insurance for more than
1.7 million cars and insures more than 1.4 million homes.
Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1996, Institutional Investor ranked Prudential the fifth
largest institutional money manager of the 300 largest money management
organizations in the United States as of December 31, 1995. As of December 31,
1995, Prudential had more than $314 billion in assets under management.
Prudential Investments, a business group of The Prudential, (of which
Prudential Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States./2/
Healthcare. Over two decades ago, Prudential introduced the first federally-
funded, for-profit HMO in the country. Today, almost 5 million Americans
receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
- -------
/1/Prudential Investments, a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc., Nicholas-
Applegate Capital Management as the subadviser to Nicholas-Applegate Fund,
Inc., Jennison Associates Capital Corp. as the subadviser to Prudential
Jennison Series Fund, Inc. and Prudential Active Balanced Fund, a portfolio of
Prudential Dryden Fund, Mercator Asset Management LP, as the subadviser to
International Stock Series, a portfolio of Prudential World Fund, Inc., and
BlackRock Financial Management, Inc. as the subadviser to The BlackRock
Government Income Trust. There are multiple subadvisers for The Target
Portfolio Trust.
/2/As of December 31, 1994.
III-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is the fifteenth largest mutual fund
company in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Growth Fund, a
growth-style equity fund managed by Jennison Associates Capital Corp., a
premier institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase./3/ Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- -------
/3/As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
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.
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.
- -------
/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.
/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.
III-3
<PAGE>
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.
III-4
<PAGE>
Prudential
Active
Balanced
Fund
A N N U A L
R E P O R T
Sept. 30, 1997
[LOGO] Prudential
Investments
==========================
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
==========================
Trustees
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Donald D. Lennox
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
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 LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
74431F506 74431F605 74431F704 74431F803 MF174E3
Cat# 42M269E
B-1
<PAGE>
Prudential Active Balanced Fund
A Series of the Prudential Dryden Fund
Performance At A Glance.
Over the past 12 months, investors in U.S. stocks broadened their interests
beyond the brand-name market leaders to include the less well-known and somewhat
smaller companies favored by the Prudential Active Balanced Fund. So our stock
holdings did quite well. However, their contribution to our return was diluted
because we generally held less than 50% of assets in stock over the past year,
while most balanced funds held 60%. We did this because we believed stock prices
were high and vulnerable to earnings disappointments.
- --------------------------------------------------------------------------------
Six One Three Since
Months Year Years Inception(2)
----------------------------------------------------------------
Class A 15.74% N/A N/A 17.48%
----------------------------------------------------------------
Cumulative Class B 15.37% N/A N/A 16.91%
Total ----------------------------------------------------------------
Returns(1) Class C 15.37% N/A N/A 16.91%
As of 9/30/97 ----------------------------------------------------------------
Class Z 15.88% 21.34% 55.78% 73.98%
----------------------------------------------------------------
Lipper Balanced
Fund Avg(3) 17.57% 24.03% 66.73% ***
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
One Three Since
Average Annual Year Years Inception(2)
Total Returns(1)----------------------------------------------------------------
As of 9/30/97
Class Z 21.34% 15.92% 12.40%
- --------------------------------------------------------------------------------
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1)Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales charges.
The Fund charges a maximum front-end sales load of 5% for Class A shares and a
declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%
for six years, for Class B shares. Class C shares have a 1% CDSC for one year.
Class B shares will automatically convert to Class A shares on a quarterly
basis, approximately seven years after purchase. Class Z shares are not subject
to a sales charge or a distribution fee. Since Class A, B and C shares have been
in existence less than one year, no average annual total returns are presented.
(2)Inception dates: 11/7/97 for Class A, B, and C shares; 1/4/93 for Class Z
shares.
(3)Lipper average returns are 363 funds for six months, 333 funds for one year,
and 209 funds for three years.
*** Lipper Since Inception returns are 21.61% for Class A, B, and C shares and
83.72% for Class Z shares for all shares in each share class.
================================================================================
How Investments Compared.
(As of 9/30/97)
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
20 YEAR AVERAGE
12 MONTH ANNUAL TOTAL
TOTAL RETURNS RETURNS
------------- ------------
US GROWTH FUNDS 33.51% 16.02%
GENERAL BOND FUNDS 12.63% 9.75%
GENERAL MUNI DEBT FUNDS 8.59% 7.26%
MONEY MARKET FUNDS 4.86% 7.69%
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
B-2
<PAGE>
================================================================================
================================================================================
Bradley Goldberg, Fund Manager [PHOTOGRAPH]
/s/ Brad Goldberg
Portfolio
Manager's Report
The Prudential Active Balanced Fund seeks the higher returns that stocks have
historically provided, while trying to avoid the risks inherent in an all-stock
portfolio. The Fund invests in a combination of stocks, bonds and lower-risk
money market instruments, such as short-term U.S. Treasury securities. By
diversifying in this way, the Fund aims to benefit from rising stock markets and
to provide investors with greater protection when stocks fall. There can be no
assurance that the Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
A Hybrid Strategy.
In stocks, we use a hybrid of growth and value investing, aiming at both greater
earnings growth than the market and lower valuations. We look at companies we
think will produce better earnings or earnings sustainability than most
investors expect. We're somewhat contrarian -- we look where most portfolio
managers don't. Our bond investment strategy is cautious. We use bonds to
stabilize the price swings of the portfolio.
- --------------------------------------------------------------------------------
Strategy Session.
- --------------------------------------------------------------------------------
The sustainability of corporate earnings growth is the dominant issue for
investment strategy today. Earnings have been at record highs and stock prices
have risen to expensive levels (even for such elevated earnings). Should
earnings falter, stock prices could fall.
================================================================================
Portfolio Composition
Sectors expressed as a percentage
of net assets as of 9/30/97.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Consumer Durables 5%
Other 3%
Energy 8%
Consumer Staples 22%
Technology 14%
Basic Materials 19%
Intermediate Goods & Services 14%
Financial Services 15%
</TABLE>
================================================================================
Throughout the past year, we held a smaller proportion of stocks than our peers
and our comparative performance suffered. On September 30, stock prices were
even higher and there had been signs that market leaders were hitting earnings
plateaus. Although we have reduced the amount of cash we hold to below 10%, most
of our additional investment has gone into bonds. Our stock holdings were only
51% of net assets, below the 60% we consider neutral. Bonds made up 39% of our
investments as of September 30.
Stocks.
In this environment, our investment style -- looking for long-term earnings
growth at faster rates than the overall market in companies selling
significantly below the average ratio of price to earnings -- is particularly
appropriate. For example, we recently purchased Dole Foods at about 13 times its
estimated 1998 earnings, while many food companies sell for more than 20 times
earnings. Why is Dole so inexpensive? Because bananas, which are classified as
commodities, are a large part of their product mix, so the company is priced as
a commodity producer instead of as a food company. We believe Dole is developing
a more broad-based product mix, and that its share price should move up when
investors come to recognize this.
Bonds.
We believe the current premium paid on corporate bonds over Treasuries is too
small to warrant taking the increased risk, so we are predominantly in Treasury
bonds. We increased the duration of our portfolio -- a measure of its
sensitivity to changes in interest rates -- slightly to 5.5 years.
B-3
<PAGE>
Comparing A $10,000 Investment.
-------------------------------
Prudential Active Balanced Fund vs. the S&P 500 Index
and the Lehman Government/Corporate Bond Index.
Past performance is not indicative 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 Active Balanced Fund (Class A, B, C and Z
shares) with similar investments in the Standard & Poor's 500 Index (S&P 500)
and the Lehman Government/Corporate Bond Index 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 1996 for Class A, B, and C
shares; and 1993 for Class Z shares. For purposes of the graph and, unless
otherwise indicated in the accompanying table, it has been assumed (a) that the
maximum applicable front-end sales charge was deducted from the initial $10,000
investment in Class A shares; (b) the maximum applicable contingent deferred
sales charge was deducted from the value of the investment in Class B and Class
C shares, assuming full redemption on September 30, 1997; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested. Since Class A, B, and C shares have been in
existence less than a year, no average annual total returns are presented. Class
B shares automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase. This conversion feature is not
reflected in the graph. Class Z shares are not subject to a sales charge or
distribution fee.
The Lehman Index is a weighted index comprised of public, fixed rate,
non-convertible domestic corporate debts that are rated at least investment
grade (BBB/Baa or higher) and public obligations of the U.S. Treasury. 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
Lehman Index and the S&P 500 Index are unmanaged indices and both include the
reinvestment of all income, but do not reflect the payment of transaction costs
and advisory fees associated with an investment in the Fund. The securities
which comprise the Lehman Index and the S&P 500 Index may differ substantially
from the securities in the Fund's portfolio. The Lehman Index and the S&P 500
Index are not the only indices which may be used to characterize performance of
actively balanced funds and other indices may portray different comparative
performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Class A -- 11/7/96 - 9/30/97
Prudential Active Balanced Fund -- $11,161
S&P 500 Index -- $13,666
Lehman Gov't/Corp Index -- $10,710
Class B -- 11/7/96 - 9/30/97
Prudential Active Balanced Fund -- $11,191
S&P 500 Index -- $13,666
Lehman Gov't/Corp Index -- $10,710
Class C -- 11/7/96 - 9/30/97
Prudential Active Balanced Fund -- $11,591
S&P 500 Index -- $13,666
Lehman Gov't/Corp Index -- $10,710
Class Z -- 1/4/93 - 9/30/97
Prudential Active Balanced Fund -- $17,398
S&P 500 Index -- $24,440
Lehman Gov't/Corp Index -- $13,980
AVERAGE ANNUAL
TOTAL RETURNS -- CLASS Z
-----------------------------------
Without Sales Load
12.40% Since Inception
21.34% for 1 Year
B-4
<PAGE>
What Went Well.
- --------------------------------------------------------------------------------
Stocks Did Well.
Our stock holdings increased their return substantially when investors widened
their focus from a few large familiar companies to include the smaller and
cheaper companies that we favor.
Our focus on publishing companies paid off very well. The New York Times
Corporation, one of our largest holdings, and McGraw Hill, which owns Standard &
Poor's as well as many electronic and paper publications, have both performed
well through the year.
In financial services, CIGNA -- an insurance company -- was our third largest
holding and also a great success. We also did well on Hibernia -- a bank holding
company. It was among our 10 largest holdings.
General Motors has been restructuring for about 18 months; investors are now
recognizing the fruits of that move. We think GM is positioned to reward
shareholders over the next few years with higher earnings and more share
repurchases than expected. The stock is still quite reasonably priced, selling
at only about nine times earnings, when the multiples for most comparable firms
are well into the double digits.
IBM, a traditional computer and systems integration firm, had been somewhat
neglected by investors who focused on the fast moving personal computer
business. IBM's sound performance in its primary businesses drove the stock
nicely higher in the past year.
And Not So Well.
- --------------------------------------------------------------------------------
Too Much Cash.
We held a fairly large amount of cash -- as much as 19% during the year -- and
we would have earned more had that been invested in stocks or bonds. We believed
that this stock market's prices were quite vulnerable to a setback. We had a
defensive position, holding more cash than usual through the entire fiscal year.
When stocks turned down in October, this cash cushioned our portfolio.
During most of our reporting period, investors preferred the large, name-brand
growth stocks that we were avoiding because we thought they were overpriced. If
we had joined the herd, we would have improved our performance considerably over
that period. However, we believe it would have been unwise to try to time
precisely the turn toward our less expensive stocks. Over the full period, our
stocks more than caught up.
- --------------------------------------------------------------------------------
Five Largest
Holdings.
2.6% General Motors Corp.
Automobiles
2.0% New York Times Co.
Publishing
2.0% CIGNA Corp.
Insurance
1.7% International Business
Machines Corp.
Computer Systems
1.7% The Limited, Inc.
Retail
Expressed as a percentage of total net assets as of 9/30/97.
- --------------------------------------------------------------------------------
Looking Ahead.
- --------------------------------------------------------------------------------
As of September 30, stock prices seemed high, assuming that future earnings
remain strong. We believed there wasn't much room left for stock prices to
advance. Moreover, investors had been punishing companies when their earnings
fell below analysts' high estimates even when those earnings represented
reasonable growth. The value orientation of our investment style is particularly
appropriate for this market.
We have increased our bond allocation to 39% because we believe that real
(inflation-adjusted) interest rates are too high. Bond prices could rise (and
yields fall) in a correction.
- --------------------------------------------------------------------------------
B-5
<PAGE>
Brad Goldberg Explains Hybrid Investing.
- --------------------------------------------------------------------------------
How Portfolio Manager Brad Goldberg takes the best from growth and value
investing to make the most of today's investment opportunities
Q. Are you a growth or value investor?
A. Neither. We use a hybrid of value and growth styles: we look for good
earnings growth for the portfolio as a whole at as reasonable a valuation as we
can find. We're trying to achieve better average earnings growth for our
holdings than for the S&P 500, but with a significantly lower price/earnings
ratio. We believe that such a portfolio will be rewarded over the next 12
months, particularly if the market leadership continues to broaden as it did in
the summer and early fall of 1997.
Q. So you buy moderate growth stocks because they sell at a reasonable price?
A. No. There's more earnings variation in the stocks we buy than is implied by
the term "moderate growth stock." At any time, there will be winners and losers
in the portfolio, but, on average, we expect these companies to increase their
earnings by 16% in both 1997 and 1998. This is significantly faster than the
estimated earnings growth of the S&P 500 overall -- about 11% for 1997 and 8%
for 1998. And we are not paying a premium for this earnings growth. For
estimated 1998 earnings, we're selling at less than 15 times earnings, while the
S&P 500 is at 20 times (as of September 30).
Q. Where do you look for these companies?
A. We prefer mid to large cap stocks. (Market capitalization is the market value
of all a company's outstanding shares -- what it would take to buy the entire
company.) We like companies that control their destiny and have high revenue and
unit growth rates. We frequently do well with stocks that start between $2
billion and $20 billion (as opposed to the $40-$50 billion large companies). We
monitor about 400 stocks, checking for unit growth, profitability, clean balance
sheets, management that can capitalize on opportunities, and a research and
development pipeline.
Q. How do you assess long-term growth potential?
A. At daily morning meetings, our 17 investment professionals share information
and opinions about the companies they follow. Our analysts meet their
management, suppliers, competitors and customers. We depend on our analysts to
make their own judgments about risk and reward potential using any available
information resource.
Q. Your cash holdings this year were higher than usual. Why?
A. If we don't think there's a compelling reason to put cash to work, we'll hold
back. We've tended to hold moderate amounts of cash, giving us the flexibility
to move quickly on new equity recommendations. We don't feel compelled to buy.
We buy when we are satisfied that a stock's potential reward clearly outweighs
its risk. We estimate the future trading range for a stock; a new purchase
should have three times the potential gain as loss. If we can't find a stock
like that, then we'll hold cash. And if we think a stock we own no longer has at
least twice the potential gain as loss, it's a candidate for sale. We're not
attracted to a stock that we think can rise only 15%, because the stock can also
go down 15%. We look for significantly more growth potential than that. This
year, fewer stocks had that favorable balance of risk and reward.
/s/ Brad Goldberg [PHOTOGRAPH]
- --------------------------------------------------------------------------------
B-6
<PAGE>
President's Letter November 12, 1997
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
Keep Events In Perspective.
Dear Shareholder:
For investors, the late October decline experienced by the financial markets was
unsettling -- but let's put events in perspective.
October's downturn was the third significant one this year. Stock prices fell
sharply in early spring and dropped again in late summer. Yet following each
episode the financial markets recovered any lost ground. That's very important
because it shows that investors today are not easily swayed by temporary
setbacks -- they choose to stay the course and are investing for the long term.
Despite the recent volatility, it has been a very good year for investors. Plus,
the U.S. economy is strong, inflation remains low, and unemployment is down. At
the end of the sell-off on October 27, the Standard & Poor's 500 Index had still
gained more than 18% for the year. The Dow Jones Industrial Average was also up
11% and the Nasdaq Composite nearly 19%.
Here are a few more thoughts that may help you during times of market
uncertainty:
o Keep your expectations realistic. Seasoned investors know that financial
markets rise and fall -- as will the value of their holdings. Over time,
however, stocks have been shown to produce very attractive returns. As a matter
of fact, the S&P 500 rose more than 280% from the time of the last major market
downturn (October 31, 1987) through December 31, 1996, according to Lipper
Analytical Services.
o Don't make rash decisions. If you have an investment plan, stick to it. While
past performance is not indicative of future results, historically, investors
have profited by taking advantage of the long-term growth potential of U.S.
stocks.
o We're on your side. Your Prudential Securities Financial Advisor or Pruco
Securities Registered Representative can help you understand what's happening in
the financial markets. Why not call him or her today?
Thank you for your continued confidence in Prudential Mutual Funds and
Annuities. We'll do everything we can to keep you informed and to earn your
trust.
Sincerely,
/s/ Brian M. Storms
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- --------------------------------------------------------------------------------
B-7
<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. And if you are
married and not covered by a retirement plan at work, you and your spouse may
each contribute $2,000 a year to an IRA for a total of $4,000.
- --------------------------------------------------------------------------------
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.
B-8
<PAGE>
Portfolio of Investments as of PRUDENTIAL DRYDEN FUND
September 30, 1997 PRUDENTIAL ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--90.7%
COMMON STOCKS--50.8%
- ----------------------------------------------------------------
Airlines--0.6%
10,600 Delta Air Lines, Inc. $ 998,388
- ----------------------------------------------------------------
Automobiles & Trucks--2.7%
61,800 General Motors Corp. 4,136,737
4,700 Meritor Automotive Inc.(a) 112,495
-------------
4,249,232
- ----------------------------------------------------------------
Banking--3.2%
14,400 Chase Manhattan Corp. 1,699,200
14,500 Fleet Financial Group, Inc. 950,656
142,200 Hibernia Corp. U.A. 2,417,400
-------------
5,067,256
- ----------------------------------------------------------------
Business Services--4.3%
40,975 CUC International Inc.(a) 1,270,225
25,000 Hertz Corp 942,187
20,300 Manpower, Inc. 801,850
50,200 Ogden Corp. 1,185,975
8,600 Omnicom Group 625,650
58,800 Ryder System, Inc. 2,113,125
-------------
6,939,012
- ----------------------------------------------------------------
Computer Systems/Peripherals--4.1%
18,400 Digital Equipment Corp.(a) 796,950
20,000 Hewlett-Packard Co. 1,391,250
25,700 International Business Machines
Corp. 2,722,594
21,550 Symbol Technologies, Inc. 946,853
48,100 Unisys Corp.(a) 736,531
-------------
6,594,178
- ----------------------------------------------------------------
Food--1.2%
42,900 Dole Food Company, Inc. 1,938,544
- ----------------------------------------------------------------
Hotels--0.9%
41,000 Hilton Hotels Corp. $ 1,381,188
- ----------------------------------------------------------------
Household & Personal Care Products--0.5%
44,300 The Dial Corp. 772,481
- ----------------------------------------------------------------
Insurance--2.8%
16,800 CIGNA Corp. 3,129,000
27,600 NAC Re Corp. 1,417,950
-------------
4,546,950
- ----------------------------------------------------------------
Machinery--1.0%
16,800 Case Corp. 1,119,300
9,400 Caterpillar Inc. 507,012
-------------
1,626,312
- ----------------------------------------------------------------
Media--0.7%
43,200 Westinghouse Electric Corp. 1,169,100
- ----------------------------------------------------------------
Metals--2.2%
47,700 Alumax, Inc.(a) 1,949,738
22,900 Reynolds Metals Co. 1,621,606
-------------
3,571,344
- ----------------------------------------------------------------
Oil Services--2.0%
25,300 Baker Hughes, Inc. 1,106,875
25,600 Dresser Industries, Inc. 1,100,800
21,800 Unocal Corp. 942,850
-------------
3,150,525
- ----------------------------------------------------------------
Paper--2.3%
35,500 Boise Cascade Corp. 1,493,219
22,300 Champion International Corp. 1,358,906
49,600 Stone Container Corp. 771,900
-------------
3,624,025
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as of PRUDENTIAL DRYDEN FUND
September 30, 1997 PRUDENTIAL ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
Petroleum (Domestic)--2.3%
18,600 Amerada Hess Corp. $ 1,147,387
17,900 Anadarko Petroleum Corp. 1,285,444
49,023 Union Pacific Resources Group, Inc. 1,283,790
-------------
3,716,621
- ----------------------------------------------------------------
Pharmaceuticals--0.1%
4,300 Vertex Pharmaceuticals, Inc.(a) 162,325
- ----------------------------------------------------------------
Photography/Imaging Technology--1.0%
19,200 Xerox Corp. 1,616,400
- ----------------------------------------------------------------
Publishing--5.7%
43,700 American Greetings Corp. 1,611,438
30,600 McGraw-Hill Companies, Inc. 2,071,237
61,000 New York Times Co. 3,202,500
39,900 Tribune Co. 2,127,169
-------------
9,012,344
- ----------------------------------------------------------------
Railroads--0.9%
21,561 Union Pacific Corp. 1,350,258
- ----------------------------------------------------------------
Realty Investment Trust--0.7%
39,450 Avalon Properties, Inc. 1,173,638
- ----------------------------------------------------------------
Retail--3.0%
24,100 AutoZone, Inc.(a) 723,000
108,979 The Limited, Inc. 2,663,174
24,600 Sears, Roebuck & Co. 1,400,663
-------------
4,786,837
- ----------------------------------------------------------------
Savings & Loan--0.9%
20,200 Washington Mutual, Inc. 1,408,950
- ----------------------------------------------------------------
Semiconductor Devices & Equipment--0.5%
35,600 International Rectifier Corp.(a) $ 832,150
- ----------------------------------------------------------------
Specialty Chemicals--2.5%
24,200 Betz Dearborn Inc. 1,654,675
32,200 Dexter Corp. 1,290,012
31,000 Morton International, Inc. 1,100,500
-------------
4,045,187
- ----------------------------------------------------------------
Steel & Metal--2.0%
24,300 Kennametal, Inc. 1,178,550
30,800 Steel Dynamics, Inc.(a) 723,800
37,800 USX Corp.-U.S. Steel Group 1,313,550
-------------
3,215,900
- ----------------------------------------------------------------
Telecommunications Equipment--1.4%
33,900 General Motors Corp., Series H 2,241,636
- ----------------------------------------------------------------
Trucking & Shipping--0.5%
25,300 Knightsbridge Tankers Ltd. 716,306
- ----------------------------------------------------------------
Waste Management--0.8%
36,800 Waste Management Inc. 1,285,701
-------------
Total common stocks
(cost $58,321,045) 81,192,788
-------------
PREFERRED STOCKS--0.5%
- ----------------------------------------------------------------
15,400 USX Capital Trust Conv. Pfd. 6.75%
(cost $736,572) 736,313
-------------
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1997
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
DEBT OBLIGATIONS--39.4%
- ----------------------------------------------------------------
Corporate Bonds--1.0%
$1,570 General Motors Acceptance Corp.
6.75%, 2/7/02
(cost $1,576,798) $ 1,588,840
-------------
- ----------------------------------------------------------------
U.S. Government Securities--38.4%
9,805 United States Treasury Bond,
7.875%, 2/15/21 11,422,825
United States Treasury Notes,
4,865 8.875%, 11/15/98 5,029,194
7,045 7.50%, 11/15/01 7,424,796
17,435 6.25%, 2/15/03 17,601,155
20,300 5.75%, 8/15/03 19,985,959
-------------
Total U.S. Government securities
(cost $59,559,007) 61,463,929
-------------
Total debt obligations
(cost $61,135,805) 63,052,769
-------------
Total long-term investments
(cost $120,193,422) 144,981,870
-------------
SHORT-TERM INVESTMENT--10.6%
- ----------------------------------------------------------------
Repurchase Agreement--10.6%
16,910 Joint Repurchase Agreement Account,
6.127%, 10/01/97 (Note 5)
(cost $16,910,000) 16,910,000
- ----------------------------------------------------------------
Total Investments--101.3%
(cost $137,103,422; Note 4) 161,891,870
Liabilities in excess of other
assets--(1.3%) (2,011,517)
-------------
Net Assets--100% $ 159,880,353
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
- ----------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL DRYDEN FUND
Statement of Assets and Liabilities PRUDENTIAL ACTIVE BALANCED FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1997
<S> <C>
sInvestments, at value (cost $137,103,422).............................................................. $161,891,870
Cash................................................................................................... 205,643
Dividends and interest receivable...................................................................... 866,767
Receivable for investments sold........................................................................ 577,190
Receivable for Fund shares sold........................................................................ 127,392
Deferred expenses and other assets..................................................................... 7,060
------------------
Total assets....................................................................................... 163,675,922
------------------
Liabilities
Payable for investments purchased...................................................................... 2,261,304
Payable for Fund shares reacquired..................................................................... 1,359,140
Accrued expenses....................................................................................... 89,843
Management fee payable................................................................................. 84,977
Distribution fee payable............................................................................... 305
------------------
Total liabilities.................................................................................. 3,795,569
------------------
Net Assets............................................................................................. $159,880,353
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 11,065
Paid-in capital in excess of par.................................................................... 120,808,732
------------------
120,819,797
Undistributed net investment income................................................................. 3,191,713
Accumulated net realized gain on investments........................................................ 11,080,395
Net unrealized appreciation on investments.......................................................... 24,788,448
------------------
Net assets, September 30, 1997......................................................................... $159,880,353
------------------
------------------
Class A:
Net asset value and redemption price per share
($990,155 / 68,713 shares of beneficial interest issued and outstanding)......................... $14.41
Maximum sales charge (5% of offering price)......................................................... .76
------
Maximum offering price to public.................................................................... $15.17
======
Class B:
Net asset value, offering price and redemption price per share
($212,588 / 14,829 shares of beneficial interest issued and outstanding)......................... $14.34
======
Class C:
Net asset value, offering price and redemption price per share
($5,252 / 366 shares of beneficial interest issued and outstanding).............................. $14.34
======
Class Z:
Net asset value, offering price and redemption price per share
($158,672,358 / 10,980,644 shares of beneficial interest issued and outstanding)................. $14.45
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1997
<S> <C>
Income
Interest.............................. $ 4,870,516
Dividends (net of foreign withholding
taxes of $522)..................... 1,282,755
------------------
Total income......................... 6,153,271
------------------
Expenses
Management fee........................ 1,009,861
Distribution fee--Class A............. 228
Distribution fee--Class B............. 650
Distribution fee--Class C............. 6
Registration fees..................... 183,000
Transfer agent's fees and expenses.... 167,000
Custodian's fees and expenses......... 92,000
Reports to shareholders............... 88,000
Legal fees............................ 33,000
Administration fee.................... 21,553
Audit fee............................. 15,000
Organization expense.................. 13,213
Trustees' fees........................ 11,250
Miscellaneous......................... 1,676
------------------
Total expenses....................... 1,636,437
------------------
Net investment income.................... 4,516,834
------------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions.......................... 11,725,117
Net change in unrealized appreciation on
investments........................... 13,786,966
------------------
Net gain on investments.................. 25,512,083
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 30,028,917
------------------
------------------
</TABLE>
PRUDENTIAL DRYDEN FUND
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended September 30,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 4,516,834 $ 4,391,687
Net realized gain on
investment.................. 11,725,117 9,129,045
Net change in unrealized
appreciation/depreciation on
investments................. 13,786,966 (1,120,181)
------------ -------------
Net increase in net assets
resulting from operations... 30,028,917 12,400,551
------------ -------------
Dividends and distributions
Dividends to shareholders from
net investment income
Class A..................... (64) --
Class B..................... (6) --
Class C..................... (6) --
Class Z..................... (4,627,738) (3,972,955)
------------ -------------
(4,627,814) (3,972,955)
------------ -------------
Distributions to shareholders
from net realized gains
Class A..................... (128) --
Class B..................... (12) --
Class C..................... (12) --
Class Z..................... (9,255,475) (1,932,789)
------------ -------------
(9,255,627) (1,932,789)
------------ -------------
Fund share transactions (Note 6)
Net proceeds from shares
sold........................ 55,048,728 36,454,403
Net asset value of shares
issued in reinvestment of
distributions............... 13,883,406 5,905,744
Cost of shares reacquired...... (78,785,554) (28,618,544)
------------ -------------
Net increase (decrease) in net
assets from Fund share
transactions................ (9,853,420) 13,741,603
------------ -------------
Total increase.................... 6,292,056 20,236,410
Net Assets
Beginning of year................. 153,588,297 133,351,887
------------ -------------
End of year....................... $159,880,353 $ 153,588,297
------------ -------------
------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Prudential Dryden Fund (the "Company") is registered under the Investment
Company Act of 1940 as an open-end, diversified management investment company.
The Company was established as a Delaware business trust on May 11, 1992 and
currently consists of six separate funds, one of which is Active Balanced Fund
(the "Fund"). Prior to October 30, 1996 the Company was named the Prudential
Institutional Fund and prior to September 20, 1996, it consisted of seven
separate funds (the "Funds"), five of which were reorganized on September 20,
1996 and combined with existing funds in the Prudential Mutual Funds family of
funds (see Note 7).
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. Investment operations of the Fund commenced
on January 4, 1993. The Fund's investment objective is to achieve total returns
approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: Securities, including options, warrants, futures contracts
and options thereon, for which the primary market is a national securities
exchange, commodities exchange, board of trade or NASDAQ are valued at the last
sale price on such exchange or board of trade on the date of valuation or, if
there was no sale on such day, at the mean between the closing bid and asked
prices quoted on such day or at the bid price in the absence of an asked price.
Securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued by a principal market maker or independent pricing
agent.
U.S. government securities for which market quotations are readily available are
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
methodology or provides a valuation or methodology that, in the judgment of the
subadviser, does not represent fair value, are valued at fair value as
determined under procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net investment income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over a period of sixty months
from the date each of the Funds commenced investment operations.
Reclassification of Capital Accounts: The Fund accounts 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 fiscal year
ended September 30, 1997, the application of this statement increased unrealized
appreciation on investments and decreased paid-in capital by $7,210. Net
investment income, net realized gains, and net assets were not affected by these
reclassifications.
- ------------------------------------------------------------
Note 2. Agreements
The Fund had a management agreement with Prudential Institutional Fund
Management, Inc. through October 30, 1996. Pursuant to this agreement,
Prudential Institutional Fund Management, Inc. had responsibility for all
investment advisory services and supervised the subadviser's performance of such
services.
Prudential Institutional Fund Management, Inc. had a subadvisory agreement with
Jennison Associates Capital Corp. ("Jennison") through October 30, 1996.
Jennison furnished investment advisory services in connection with the
management of the Fund. Prudential Institutional Fund Management, Inc. paid for
the costs and expenses attributable to the subadvisory agreements and the
salaries and expenses of all personnel of the Fund except for fees and expenses
of unaffiliated Trustees. The Fund paid for all other costs and expenses.
Through October 30, 1996 the management fee paid Prudential Institutional Fund
Management, Inc. was computed daily and payable monthly at an annual rate of .70
of 1% of the average daily net assets of the Fund. Effective October 31, 1996
the Fund entered into a management agreement with Prudential Investments Fund
Management LLC ("PIFM") under which the management fee is computed daily and
payable monthly at an annual rate of .65 of 1% of the average daily net assets
of the Fund. Pursuant to this agreement PIFM has responsibility for all
investment advisory services. PIFM has entered into a subadvisory agreement with
Jennison under which Jennison is compensated by PIFM 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. This is the same rate paid to Jennison under the prior
subadvisory agreement.
Jennison, subject to the supervision of PIFM, manages the assets of the Fund in
accordance with its investment objectives and policies and in a manner
consistent with the previous arrangement. PIFM pays for the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund will bear all other costs and expenses.
The Fund had an administration agreement with PIFM through October 30, 1996. The
administration fee paid PIFM was computed daily and payable monthly, at an
annual rate of .17% of the Company's average daily net assets up to $250 million
and .15% of the Company's average daily net assets in excess of $250 million.
PIFM furnished to the Fund such services as the Fund required in connection with
the administration of the Fund's business affairs. PIFM provided certain
transfer agent services through its wholly-owned subsidiary, Prudential Mutual
Fund Services LLC ("PMFS"). For such services, PMFS was paid .03% of the
Company's average daily net assets up to $250 million and .02% of the Company's
average daily net assets in excess of $250 million from the administration fee
paid to PIFM (see note 3 below).
Effective October 31, 1996 Prudential Securities Incorporated ("PSI") became the
distributor of the Fund's Class A, Class B and Class C shares. PSI also incurs
the expenses of distributing the Fund's Class Z shares under the distribution
agreement, none of which is reimbursed by or paid for by the Fund. The Fund
compensates PSI for distributing and servicing the Fund's Class A, Class B and
Class C shares pursuant to plans of distribution (the "Class A, B and C Plans"),
regardless of expenses actually incurred. The distribution fees are accrued
daily and payable monthly. No distribution or service fees are paid to PSI as
distributor of Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were charged at a rate of .25 of 1%, 1% and 1% of
the average daily net assets of the Class A, B and C shares, respectively, for
the period November 7, 1996 through September 30, 1997.
PSI has advised the Fund that it received approximately $12,900 in front-end
sales charges resulting from sales of Class A shares during the period ended
September 30, 1997. From these fees, PSI paid such sales charges to affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Jennison, PIFM and PSI are wholly-owned subsidiaries of The Prudential Insurance
Company of America.
The Fund, along with other affiliated registered investment companies (the
"funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of September 30,
1997. The funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the funds.
- -------------------------------------------------------------------------------
Note 3. Other Transactions With Affiliates
PMFS, a wholly-owned subsidiary of PIFM, serves as the Fund's transfer agent.
During the year ended September 30, 1997, the Fund incurred fees of
approximately $165,100 for the services of PMFS. As of September 30, 1997,
approximately $16,200 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations also include certain out-of-pocket
expenses paid to non-affiliates.
- -------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1997 aggregated $64,694,120 and $66,972,643,
respectively.
The cost basis of investments for federal income tax purposes is $137,231,525.
As of September 30, 1997, net unrealized appreciation for federal income tax
purposes was $24,660,345 (gross unrealized appreciation--$24,737,869, gross
unrealized depreciation--$77,524).
- -------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more joint repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At September 30,
1997, the Fund had a 1.3% undivided interest in the repurchase agreements in the
joint account. The undivided interest represented $16,910,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Credit Suisse First Boston Corp., 6.15%, in the principal amount of
$341,000,000, repurchase price $341,058,254, due 10/1/97. The value of the
collateral including accrued interest was $352,935,110.
Goldman, Sachs & Co., 6.15%, in the principal amount of $341,000,000, repurchase
price $341,058,254, due 10/1/97. The value of the collateral including accrued
interest was $347,820,010.
Morgan Stanley, Dean Witter, Discover & Co., 6.15%, in the principal amount of
$325,256,000, repurchase price $325,311,564, due 10/1/97. The value of the
collateral including accrued interest was $331,761,960.
UBS Securities LLC, 6.06%, in the principal amount of $341,000,000, repurchase
price $341,057,402, due 10/1/97. The value of the collateral including accrued
interest was $347,821,030.
- -------------------------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. Special exchange privileges are also available for
shareholders who qualify to purchase Class A shares at net asset value or Class
Z shares. Class Z shares are not subject to any sales or redemption charge and
are offered exclusively for sale to a limited group of investors. The Fund has
authorized an unlimited number of shares of beneficial interest at $.001 par
value per share. Transactions in shares of beneficial interest during the year
ended September 30, 1997 and September 30, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 68,711 $ 971,421
Shares issued in reinvestment of
dividends and distributions...... 15 183
Shares reacquired.................. (13) (178)
---------- ------------
Net increase in shares
outstanding...................... 68,713 $ 971,426
========== ============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL DRYDEN FUND
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 14,903 $ 197,257
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. (75) (964)
---------- ------------
Net increase in shares
outstanding...................... 14,829 $ 196,302
========== ============
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
November 7, 1996(a)
through September 30, 1997:
Shares sold........................ 365 $ 5,122
Shares issued in reinvestment of
dividends and distributions...... 1 9
Shares reacquired.................. -- --
---------- ------------
Net increase in shares
outstanding...................... 366 $ 5,131
========== ============
<CAPTION>
Class Z
- -----------------------------------
<S> <C> <C>
Year ended September 30, 1997:
Shares sold........................ 4,174,112 $ 53,874,928
Shares issued in reinvestment of
dividends and distributions...... 1,097,487 13,883,205
Shares reacquired.................. (6,097,293) (78,784,412)
---------- ------------
Net decrease in shares
outstanding...................... (825,694) $(11,026,279)
========== ============
Year ended September 30, 1996:
Shares sold........................ 2,893,381 $ 36,454,403
Shares issued in reinvestment of
dividends and distributions...... 483,285 5,905,744
Shares reacquired.................. (2,273,501) (28,618,544)
---------- ------------
Net increase in shares
outstanding...................... 1,103,165 $ 13,741,603
========== ============
</TABLE>
- ---------------
(a) Commencement of offering of Class A, B, and C shares.
Of the shares outstanding at September 30, 1997, PIFM and affiliates owned
388,158 shares of the Fund.
- ------------------------------------------------------------
Note 7. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and Plan of
Reorganization (the "Plan of Reorganization") for five other series of the
Company. Each Plan of Reorganization was approved by applicable shareholders on
September 7, 1996. This Fund approved new manager, distributor and transfer
agency agreements on October 30, 1996.
Under each Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund ("Series")
were transferred at net asset value for equivalent value of Class Z shares of
Prudential Jennison Series Fund, Inc., Prudential Allocation Fund--Balanced
Portfolio, Prudential Government Income Fund, Inc. and Prudential MoneyMart
Assets, Inc., respectively. These Series then ceased operations.
The Company's International Stock Fund joined the Prudential Global Fund as
separate series of a newly named Prudential World Fund. Existing shareholders
became Class Z shareholders and the International Stock Fund also began offering
Classes A, B and C shares.
Prudential Stock Index Fund and the Fund remained a series of The Prudential
Institutional Fund (renamed the Prudential Dryden Fund). Existing shareholders
of the Fund became Class Z shareholders and the Fund began offering Classes A, B
and C shares. Prudential Stock Index Fund offers Class I and Class Z shares.
Effective October 30, 1996 these funds were managed by PIFM. PMFS provides
transfer agency services and PSI acts as distributor.
- ------------------------------------------------------------
Note 8. Proposed Reorganization
On August 26, 1997, the Board of Trustees of the Fund Company approved an
Agreement and Plan of Conversion and Liquidation (the "Plan") which provides for
the transfer of all of the assets of the Fund to the Prudential Jennison Series
Fund, Inc.--Prudential Jennison Active Balanced Fund (the "Portfolio") in
exchange for the respective Class A, Class B, Class C and Class Z shares of the
Portfolio and the Portfolio's assumption of the liabilities of the Fund.
The Plan is subject to approval by the shareholders of the Fund at a shareholder
meeting scheduled on January 15, 1998. If the Plan is approved, it is expected
that the reorganization will take place on or about January 23, 1998. The Fund
will bear the costs of the reorganization, including the cost of proxy
solicitation.
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL DRYDEN FUND
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------------- ------------- ------------- ------------------------------------
November 7, November 7, November 7,
1996(e) 1996(e) 1996(e)
Through Through Through Year Ended September 30,
September 30, September 30, September 30, ------------------------------------
1997 1997 1997 1997 1996 1995
------------- ------------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 13.40 $ 13.40 $ 13.40 $ 13.01 $ 12.46 $ 10.92
----- ----- ----- ---------- -------- --------
Income from investment
operations:
Net investment income............. .21(f) .19(f) .13(f) .39(f) .29(b) .33(b)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.97 1.92 1.98 2.22 .81 1.54
----- ----- ----- ---------- -------- --------
Total from investment
operations.................. 2.18 2.11 2.11 2.61 1.10 1.87
----- ----- ----- ---------- -------- --------
Less distributions:
Dividends from net investment
income......................... (.39) (.39) (.39) (.39) (.37) (.29)
Distributions from net realized
gains.......................... (.78) (.78) (.78) (.78) (.18) (.04)
----- ----- ----- ---------- -------- --------
Total distributions............ (1.17) (1.17) (1.17) (1.17) (.55) (.33)
----- ----- ----- ---------- -------- --------
Net asset value, end of period.... $ 14.41 $ 14.34 $ 14.34 $ 14.45 $ 13.01 $ 12.46
----- ----- ----- ---------- -------- --------
----- ----- ----- ---------- -------- --------
TOTAL RETURN(d)................... 17.48% 16.91% 16.91% 21.34% 9.11% 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $ 990 $ 213 $ 5 $158,672 $153,588 $133,352
Average net assets (000).......... $ 100 $ 71 $ 1 $154,199 $142,026 $104,821
Ratios to average net assets:
Expenses, including
distribution fees........... 1.31%(c) 2.06%(c) 2.06%(c) 1.06% 1.00%(b) 1.00%(b)
Expenses, excluding
distribution fees........... 1.06%(c) 1.06%(c) 1.06%(c) N/A N/A N/A
Net investment income.......... 2.69%(c) 1.94%(c) 1.94%(c) 2.94% 3.09%(b) 3.53%(b)
Portfolio turnover rate........... 50% 50% 50% 50% 51% 30%
Average commission rate paid per
share.......................... $ .0625 $ .0625 $ .0625 $ .0625 $ .0654 N/A
<CAPTION>
January 4,
1993(a)
Through
September 30,
1994 1993
------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 11.05 $ 10.00
------- ------
Income from investment
operations:
Net investment income............. .24(b) .21(b)
Net realized and unrealized gain
(loss) on investment
transactions................... (.12) .84
------- ------
Total from investment
operations.................. .12 1.05
------- ------
Less distributions:
Dividends from net investment
income......................... (.14) --
Distributions from net realized
gains.......................... (.11) --
------- ------
Total distributions............ (.25) --
------- ------
Net asset value, end of period.... $ 10.92 $ 11.05
------- ------
------- ------
TOTAL RETURN(d)................... 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $81,176 $38,786
Average net assets (000).......... $58,992 $12,815
Ratios to average net assets:
Expenses, including
distribution fees........... 1.00%(b) 1.00%(b)(c)
Expenses, excluding
distribution fees........... N/A N/A
Net investment income.......... 3.06%(b) 2.68%(b)(c)
Portfolio turnover rate........... 40% 47%
Average commission rate paid per
share.......................... N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return 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 return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies where
applicable.
(e) Commencement of offering of Class A, B and C shares.
(f) Calculated based upon weighted average shares outstanding during the year.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL DRYDEN FUND
Report of Independent Accountants PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Dryden Fund--Prudential Active Balanced Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Dryden Fund--Prudential
Active Balanced Fund (the "Fund", one of the portfolios constituting Prudential
Dryden Fund) (formerly The Prudential Institutional Fund--Prudential Active
Balanced Fund) at September 30, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for the year then ended,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at September 30, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where securities purchased had not been received, provides a
reasonable basis for the opinion expressed above. The accompanying statement of
changes in net assets for the year ended September 30, 1996 and the financial
highlights for each of the four periods in the period ended September 30, 1996
were audited by other independent accountants, whose opinion dated November 13,
1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 14, 1997
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL DRYDEN FUND
Change of Auditors PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the year ended September 30, 1993, through September 30, 1996,
Deloitte & Touche LLP expressed an unqualified opinion on the Fund's financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
PRUDENTIAL DRYDEN FUND
Federal Income Tax Information PRUDENTIAL ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Service to advise you within 60 days of
the Fund's fiscal year end (September 30, 1997) as to the federal tax income tax
status of dividends paid during such fiscal year. Accordingly, we are advising
you that for its fiscal year ended September 30, 1997, the Fund paid a dividend
from net investment income of $.39 per share, a short-term capital gain
distribution of $.17 per share, all of which is taxable as ordinary income and a
long-term capital gain distribution of $.61 per share, to Class A, B, C and Z
shares, which is taxable as such. Further, we wish to advise you that 19.51% of
the ordinary income dividends paid in the fiscal year ended September 30, 1997
qualified for the corporate dividends received deduction available to corporate
taxpayers.
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
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 the Distribution Agreement (Exhibit 7
to the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (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 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 each Management Agreement (Exhibits 6(a) and 6(c) to the
Registration Statement) and Section 4 of each Subadvisory Agreement (Exhibits
6(b), (d) and (e) to the Registration Statement) limit the liability of
Prudential Investments Fund Management LLC (PIFM), Jennison Associates Capital
Corp. (Jennison Associates) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as that interpretation of Section 17(h) and 17(i)
of such Act remains in effect and is consistently applied.
C-1
<PAGE>
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 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.
<TABLE>
<C> <C> <S>
1. (a) 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 filed via EDGAR on February 14,
1996 (File No. 33-61997).
(b) Articles Supplementary. Incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed via EDGAR on December 6, 1996 (File No. 33-61997).
(c) Amendment to Articles of Incorporation. Incorporated by reference to
Exhibit 1(c) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed via EDGAR on December 6, 1996 (File No.
33-61997).
(d) Articles Supplementary. Incorporated by reference to Exhibit 1(d) to
the Registration Statement on Form N-14 filed via EDGAR on October 17,
1997 (File No. 333-38087).
2. By-Laws of the Registrant. Incorporated by reference to Exhibit 2 to
the Registration Statement on Form N-1A filed via EDGAR on August 22,
1995 (File No. 33-61997).
3. Not Applicable.
4. Agreement and Plan of Conversion and Liquidation, filed herewith as
Appendix A to the Prospectus and Proxy Statement.*
5. Instruments defining rights of shareholders. Incorporated by reference
to Exhibit 4 to the Registration Statement on Form N-1A filed via
EDGAR on August 22, 1995 (File No. 33-61997).
6. (a) Management Agreement between 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
filed via EDGAR on February 14, 1996 (File No. 33-61997).
</TABLE>
C-2
<PAGE>
<TABLE>
<C> <C> <S>
(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 the Registration
Statement on Form N-1A filed via EDGAR on February 14, 1996 (File No.
33-61997).
(c) Form of Management Agreement between Registrant and Prudential
Investments Fund Management LLC with respect to the Prudential
Jennison Active Balanced Fund of the Registrant.*
(d) Form of Subadvisory Agreement between Jennison Associates Capital
Corp. and Prudential Investments Fund Management LLC with respect to
Prudential Jennison Active Balanced Fund of the Registrant.*
(e) Form of Subadvisory Agreement between The Prudential Investment
Corporation and Prudential Investments Fund Management LLC with
respect to Prudential Jennison Active Balanced Fund of the
Registrant.*
7. (a) Amended and Restated Distribution Agreement. Incorporated by reference
to Exhibit 7(a) to the Registration Statement on Form N-14 filed via
EDGAR on October 17, 1997 (File No. 333-38087).
(b) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit 6(b) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed via EDGAR on September 19, 1995 (File No.
33-61997).
8. Not Applicable.
9. Custodian Agreement between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 9 to the
Registration Statement on Form N-14 filed via EDGAR on June 25, 1996
(File No. 333-6755).
10. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed via EDGAR on February 14,
1996 (File No. 33-61997).
(b) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed via EDGAR on February 14,
1996 (File No. 33-61997).
(c) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed via EDGAR on February 14,
1996 (File No. 33-61997).
(d) Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
filed via EDGAR on April 15, 1996 (File No. 33-61997).
11. Opinion and Consent of Counsel. Incorporated by reference to Exhibit
11 to the Registration Statement on Form N-14 filed via EDGAR on
October 17, 1997 (File No. 333-38087).
12. Tax Opinion of Counsel. Incorporated by reference to Exhibit 12 to the
Registration Statement on Form N-14 filed via EDGAR on October 17,
1997 (File No. 333-38087).
13. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 13(a) to the Registration Statement on Form N-14 filed via
EDGAR on June 25, 1996 (File No. 333-6755).
14. (a) Consent of Independent Auditors.*
(b) Consent of Independent Accountants.*
</TABLE>
C-3
<PAGE>
<TABLE>
<C> <C> <S>
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy. Incorporated by reference to Exhibit 17(a) to the Registration
Statement on Form N-14 filed via EDGAR on October 17, 1997 (File No.
333-38087).
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. Incorporated by reference to Exhibit
17(b) to the Registration Statement on Form N-14 filed via EDGAR on
October 17, 1997 (File No. 333-38087).
(c) Prospectus of Prudential Active Balanced Fund dated November 29, 1996
(as supplemented on June 18, 1997.) Incorporated by reference to
Exhibit 17(c) to the Registration Statement on Form N-14 filed via
EDGAR on October 17, 1997 (File No. 333-38087).
(d) President's Letter. Incorporated by reference to Exhibit 17(d) to the
Registration Statement on Form N-14 filed via EDGAR on October 17,
1997 (File No. 333-38087).
</TABLE>
- --------
*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-4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed on behalf of the Registrant, in the City of New York,
and the State of New York, on the 19th day of November, 1997.
PRUDENTIAL JENNISON SERIES FUND, INC.
/s/ Richard A. Redeker
By: _________________________________
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Edward D. Beach Director
- ------------------------------------- November 19,
EDWARD D. BEACH 1997
/s/ Delayne D. Gold Director
- ------------------------------------- November 19,
DELAYNE D. GOLD 1997
/s/ Robert F. Gunia Director
- ------------------------------------- November 19,
ROBERT F. GUNIA 1997
/s/ Donald D. Lennox Director
- ------------------------------------- November 19,
DONALD D. LENNOX 1997
/s/ Douglas H. McCorkindale Director
- ------------------------------------- November 19,
DOUGLAS H. MCCORKINDALE 1997
/s/ Mendel A. Melzer Director
- ------------------------------------- November 19,
MENDEL A. MELZER 1997
/s/ Thomas T. Mooney Director
- ------------------------------------- November 19,
THOMAS T. MOONEY 1997
1
<PAGE>
SIGNATURE TITLE DATE
/s/ Stephen P. Munn Director
- ------------------------------------- November 19,
STEPHEN P. MUNN 1997
/s/ Richard A. Redeker President and
- ------------------------------------- Director November 19,
RICHARD A. REDEKER 1997
/s/ Robin B. Smith Director
- ------------------------------------- November 19,
ROBIN B. SMITH 1997
/s/ Louis A. Weil, III Director
- ------------------------------------- November 19,
LOUIS A. WEIL, III 1997
Director
- -------------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer, Principal
- ------------------------------------- Financial and November 19,
GRACE C. TORRES Accounting Officer 1997
2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS PAGE
--------- ----
<C> <C> <S> <C>
1. (a) 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 filed via EDGAR
on February 14, 1996 (File No. 33-61997).
(b) Articles Supplementary. Incorporated by reference to Exhibit
1(b) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed via EDGAR on December 6, 1996
(File No. 33-61997).
(c) Amendment to Articles of Incorporation. Incorporated by
reference to Exhibit 1(c) to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A filed via EDGAR on
December 6, 1996 (File No. 33-61997).
(d) Articles Supplementary. Incorporated by reference to Exhibit
1(d) to the Registration Statement on Form N-14 filed via
EDGAR on October 17, 1997 (File No. 333-38087).
2. By-Laws of the Registrant. Incorporated by reference to
Exhibit 2 to the Registration Statement on Form N-1A filed
via EDGAR on August 22, 1995 (File No. 33-61997).
3. Not Applicable.
4. Agreement and Plan of Conversion and Liquidation, filed
herewith as Appendix A to the Prospectus and Proxy
Statement.*
5. Instruments defining rights of shareholders. Incorporated by
reference to Exhibit 4 to the Registration Statement on Form
N-1A filed via EDGAR on August 22, 1995 (File No. 33-61997).
6. (a) Management Agreement between 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 filed via EDGAR on February 14, 1996
(File No. 33-61997).
(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 the Registration Statement on Form N-1A
filed via EDGAR on February 14, 1996 (File No. 33-61997).
(c) Form of Management Agreement between Registrant and
Prudential Investments Fund Management LLC with respect to
the Prudential Jennison Active Balanced Fund of the
Registrant.*
(d) Form of Subadvisory Agreement between Jennison Associates
Capital Corp. and Prudential Investments Fund Management LLC
with respect to Prudential Jennison Active Balanced Fund of
the Registrant.*
(e) Form of Subadvisory Agreement between The Prudential
Investment Corporation and Prudential Investments Fund
Management LLC with respect to Prudential Jennison Active
Balanced Fund of the Registrant.*
7. (a) Amended and Restated Distribution Agreement. Incorporated by
reference to Exhibit 7(a) to the Registration Statement on
Form N-14 filed via EDGAR on October 17, 1997 (File No. 333-
38087).
(b) Form of Selected Dealer Agreement. Incorporated by reference
to Exhibit 6(b) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed via EDGAR on
September 19, 1995 (File No. 33-61997).
8. Not Applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
--------- ----
<C> <C> <S> <C>
9. Custodian Agreement between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to Exhibit
9 to the Registration Statement on Form N-14 filed via EDGAR
on June 25, 1996 (File No. 333-6755).
10. (a) Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
filed via EDGAR on February 14, 1996 (File No. 33-61997).
(b) Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit 15(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
filed via EDGAR on February 14, 1996 (File No. 33-61997).
(c) Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(c) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
filed via EDGAR on February 14, 1996 (File No. 33-61997).
(d) Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 2 to the Registration Statement
on Form N-1A filed via EDGAR on April 15, 1996 (File No. 33-
61997).
11. Opinion and Consent of Counsel. Incorporated by reference to
Exhibit 11 to the Registration Statement on Form N-14 filed
via EDGAR on October 17, 1997 (File No. 333-38087).
12. Tax Opinion of Counsel. Incorporated by reference to Exhibit
12 to the Registration Statement on Form N-14 filed via EDGAR
on October 17, 1997 (File No. 333-38087).
13. Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 13(a) to the Registration Statement on
Form N-14 filed via EDGAR on June 25, 1996 (File No. 333-
6755).
14. (a) Consent of Independent Auditors.*
(b) Consent of Independent Accountants.*
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy. Incorporated by reference to Exhibit 17(a) to the
Registration Statement on Form N-14 filed via EDGAR on
October 17, 1997 (File No. 333-38087).
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under
the Investment Company Act of 1940. Incorporated by reference
to Exhibit 17(b) to the Registration Statement on Form N-14
filed via EDGAR on October 17, 1997 (File No. 333-38087).
(c) Prospectus of Prudential Active Balanced Fund dated November
29, 1996 (as supplemented on June 18, 1997.) Incorporated by
reference to Exhibit 17(c) to the Registration Statement on
Form N-14 filed via EDGAR on October 17, 1997 (File No. 333-
38087).
(d) President's Letter. Incorporated by reference to Exhibit
17(d) to the Registration Statement on Form N-14 filed via
EDGAR on October 17, 1997 (File No. 333-38087).
</TABLE>
- --------
*Filed herewith.
<PAGE>
EXHIBIT 99.6(c)
PRUDENTIAL JENNISON SERIES FUND, INC.
(Prudential Jennison Active Balanced Fund)
Management Agreement
--------------------
Agreement made this day of , 1998 between Prudential
Jennison Series Fund, Inc., a Maryland corporation (the Fund), on behalf of its
series, Prudential Jennison Active Balanced Fund (the Series), and Prudential
Investments Fund Management LLC, a New York Limited Liability corporation (the
Manager).
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
1940 Act); and
WHEREAS, the Fund desires to retain the Manager to render or contract
to obtain as hereinafter provided investment advisory services to the Series and
the Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the
Series and administrator of its corporate affairs for the
<PAGE>
period and on the terms set forth in this Agreement. The Manager accepts such
appointment and agrees to render the services herein described, for the
compensation herein provided. The Manager is authorized to enter into an
agreement with Jennison Associates Capital Corp. (Jennison) pursuant to which
Jennison shall furnish to the Series the investment advisory services in
connection with the management of the Series (the Subadvisory Agreement). The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund,
the Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Series and the composition of the Series'
portfolio, including the purchase, retention and disposition thereof, in
accordance with the Series'investment objectives, policies and restrictions as
stated in the Prospectus (hereinafter defined) and subject to the following
understandings:
(a) The Manager shall provide supervision of the Series' investments and
determine from time to time what investments
2
<PAGE>
or securities will be purchased, retained, sold or loaned by the Series, and
what portion of the assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Articles of Incorporation, By-
Laws and Prospectus (hereinafter defined) of the Series and with the
instructions and directions of the Board of Directors of the Fund and will
conform to and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts to be
purchased or sold by the Series and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) in conformity with the policy with respect to brokerage as set
forth in the Fund's Registration Statement and Prospectus (hereinafter defined)
or as the Board of Directors may direct from time to time. In providing the
Series with investment supervision, it is recognized that the Manager will give
primary consideration to securing the most favorable price and efficient
execution. Consistent with this policy, the
3
<PAGE>
Manager may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction or
other transactions to which other clients of the Manager may be a party. It is
understood that Prudential Securities Incorporated may be used as principal
broker for securities transactions but that no formula has been adopted for
allocation of the Series' investment transaction business. It is also
understood that it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and economic analysis
provided by brokers or futures commission merchants and that such brokers may
execute brokerage transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers or futures commission merchants on the
basis of seeking the most favorable price and efficient execution. Therefore,
the Manager is authorized to pay higher brokerage commissions for the purchase
and sale of securities and futures contracts for the Fund to brokers or futures
commission merchants who provide such research and analysis, subject to review
by the Fund's Board of Directors from time to time with respect to the extent
and continuation
4
<PAGE>
of this practice. It is understood that the services provided by such broker or
futures commission merchant may be useful to the Manager in connection with its
services to other clients.
On occasions when the Manager deems the purchase or sale of a security or a
futures contract to be in the best interest of the Series as well as other
clients of the Manager or the Subadviser, the Manager, to the extent permitted
by applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be so sold or purchased in
order to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Manager in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and to
such other clients.
(d) The Manager shall maintain all books and records with respect to the
Series' portfolio transactions and shall render to the Fund's Board of Directors
such periodic and special reports as the Board may reasonably request.
5
<PAGE>
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Series (including those being maintained by the
Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business day
with information relating to all transactions concerning the Series' assets.
(g) The investment management services of the Manager to the Series under
this Agreement are not to be deemed exclusive, and the Manager shall be free to
render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary of
State of Maryland (such Articles of Incorporation, as in effect on the date
hereof and as amended from time to time, are herein called the "Articles of
Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof and
as amended from time to time, are herein called the "By-Laws");
6
<PAGE>
(c) Certified resolutions of the Board of Directors of the Fund authorizing
the appointment of the Manager and approving the form of this agreement;
(d) Registration Statement under the 1940 Act and the Securities Act of
1933, as amended, on Form N-1A (the Registration Statement), as filed with the
Securities and Exchange Commission (the Commission) relating to the Series and
shares of the Series' Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on Form N-
8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Series (such Prospectus and Statement of Additional
Information, as currently in effect and as amended or supplemented from time to
time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the Fund
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
7
<PAGE>
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The
Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by the
Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the Manager
except the fees and expenses of directors who are not affiliated persons of the
Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business other than those assumed by
the Fund herein, and
(iii) the fees and other expenses payable to Jennison and The Prudential
Investment Corporation pursuant to separate Subadvisory Agreements.
The Fund assumes and will pay the expenses described below:
8
<PAGE>
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(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 expenses of the Custodian that relate to (i) the custodial
function and the recordkeeping connected therewith, (ii) preparing and
maintaining the general accounting records of the Fund and the providing of any
such records to the Manager useful to the Manager in connection with the
Manager's responsibility for the accounting records of the Fund pursuant to
Section 31 of the 1940 Act and the rules promulgated thereunder, (iii) the
pricing of the shares of the Fund, including the cost of any pricing service or
services which may be retained pursuant to the authorization of the Board of
Directors of the Fund, and (iv) for both mail and wire orders, the cashiering
function in connection with the issuance and redemption of the Fund's
securities,
(d) the fees and expenses of the Fund's Transfer and Dividend Disbursing
Agent, which may be the Custodian, that relate to the maintenance of each
shareholder account,
9
<PAGE>
(e) the charges and expenses of legal counsel and independent accountants
for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to the
Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state or
other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a member,
(i) the cost of stock certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and omissions
insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and Exchange
Commission and notifications with the states, including the preparation and
printing of the Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws for
such purposes,
10
<PAGE>
(l) allocable communications expenses with respect to investor services and
all expenses of shareholders' and directors' meetings and of preparing, printing
and mailing reports to shareholders in the amount necessary for distribution to
the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of Distribution
adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to 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 Fund's business) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to
11
<PAGE>
the Fund the amount of such reduction which exceeds the amount of such
compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Series will pay to the Manager as full compensation therefor a
fee at an annual rate of .65 of 1% of the average daily net assets of the
Series. This fee will be computed daily and will be paid to the Manager
monthly. Any reduction in the fee payable and any payment by the Manager to the
Fund pursuant to paragraph 7 shall be made monthly. Any such reductions or
payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such
12
<PAGE>
continuance is specifically approved at least annually in conformity with the
requirements of the 1940 Act; provided, however, that this Agreement may be
terminated by the Fund at any time, without the payment of any penalty, by the
Board of Directors of the Fund or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Series, or by the Manager
at any time, without the payment of any penalty, on not more than 60 days' nor
less than 30 days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment (as defined in the 1940
Act).
11. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent
13
<PAGE>
contractor and shall have no authority to act for or represent the Fund in any
way or otherwise be deemed an agent of the Fund.
13. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Fund or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to the Manager copies of any of the
above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
14
<PAGE>
15. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey, 07102-4077, Attention: Secretary; or (2) to the
Fund at 100 Mulberry Street, Newark, New Jersey, 07102-4077, Attention:
President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential Jennison Series Fund, Inc. "
or any name including the word "Prudential" and/or "Jennison" only for so long
as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by, managed by
or otherwise connected with the Manager or the Subadviser, or any organization
which shall have so succeeded to such businesses. In no event shall the Fund
use the name "Prudential Jennison Series Fund, Inc."
15
<PAGE>
or any name including the word "Prudential" or the word "Jennison" if the
Manager's function is transferred or assigned to a company of which The
Prudential Insurance Company of America does not have control or the
Subadviser's function is transferred or assigned to a company which is not
affiliated with Jennison.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL JENNISON SERIES
FUND, INC.
By___________________________
Richard A. Redeker
President
PRUDENTIAL INVESTMENTS FUND
MANAGEMENT LLC
By___________________________
Brian M. Storms
President
e:morrison\agrmts\
jen-actbal.mgt
16
<PAGE>
EXHIBIT 99.6(d)
PRUDENTIAL JENNISON SERIES FUND, INC.
(Prudential Jennison Active Balanced Fund)
SUBADVISORY AGREEMENT
Agreement made as of this day of , 1998, between Prudential
Investments Fund Management LLC, a New York Limited Liability corporation (PIFM
or the Manager), and Jennison Associates Capital Corp., a New York Corporation
(the Subadviser).
W I T N E S S E T H
WHEREAS, the Manager has entered into a Management Agreement, dated ,
1998 (the Management Agreement), with Prudential Jennison Series Fund, Inc.
(the Corporation), a Maryland corporation and a diversified, open-end management
investment company registered under the Investment Company Act of 1940 (the 1940
Act), pursuant to which PIFM will act as Manager of the Corporation;
WHEREAS, the shares of common stock of the Corporation are divided into
separate series or funds, each of which is established pursuant to a resolution
of the Board of Directors of the Corporation, and the Board of Directors may
from time to time terminate such series or funds or establish and terminate
additional series or funds;
<PAGE>
WHEREAS, the Manager has entered into a separate subadvisory agreement
dated , 1998 with The Prudential Investment Corporation (PIC), a New
Jersey corporation, pursuant to which PIC will provide investment advisory
services to the Prudential Jennison Active Balanced Fund (the Fund) with respect
to (i) the management of short-term assets, including cash, money market
instruments and repurchase agreements and (ii) the lending of portfolio
securities;
WHEREAS, the Manager desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services;
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Corporation, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objective, policies and restrictions as stated
in the Prospectus (such Prospectus and Statement of Additional Information
as currently in effect and as amended or supplemented from time to time,
being herein collectively called the "Prospectus") and subject to the
following understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and securities will
be
2
<PAGE>
purchased, retained, sold or loaned by the Fund, and what portion of the assets
will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus of the Fund and the Corporation and with
the instructions and directions of the Manager and of the Board of Directors of
the Corporation and will conform to and comply with the requirements of the 1940
Act, the Internal Revenue Code of 1986 and all other applicable federal and
state laws and regulations.
(iii) The Subadviser shall advise PIC of the dollar amount of the
Fund's assets that shall be invested in repurchase agreements, money market
instruments or held in cash and advise PIC as to the securities available for
lending and the securities to be recalled from loan. In the event the agreement
with PIC is terminated, the Subadviser shall provide investment advisory
services to the Fund with respect to the management of short-term assets and the
lending of portfolio securities under this Agreement.
(iv) The Subadviser shall determine the securities and futures
contracts to be purchased or sold by the Fund and will place orders with or
through such persons, brokers, dealers or futures commission merchants
(including but not limited to Prudential Securities Incorporated) to carry out
the policy with respect to brokerage as set forth in the Corporation's
Registration Statement and Prospectus or as the Board of Directors may direct
from time to time. In
3
<PAGE>
providing the Fund with investment supervision, it is recognized that the
Subadviser will give primary consideration to securing the most favorable price
and efficient execution. Within the framework of this policy, the Subadviser
may consider the financial responsibility, research and investment information
and other services provided by brokers, dealers or futures commission merchants
who may effect or be a party to any such transaction or other transactions to
which the Subadviser's other clients may be a party. It is understood that
Prudential Securities Incorporated may be used as principal broker for
securities transactions but that no formula has been adopted for allocation of
the Corporation's investment transaction business. It is also understood that it
is desirable for the Fund that the Subadviser have access to supplemental
investment and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage transactions
at a higher cost to the Fund than may result when allocating brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Subadviser is authorized to place orders for the
purchase and sale of securities and futures contracts for the Fund with such
brokers or futures commission merchants, subject to review by the Board of
Directors of the Corporation from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers or futures commission
4
<PAGE>
merchants may be useful to the Subadviser in connection with the Subadviser's
services to other clients.
On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund as well as
other clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures contracts so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Subadviser in the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations to the Fund, the
Corporation and to such other clients.
(v) The Subadviser shall maintain all books and records with respect to
the Fund's portfolio transactions required by subparagraphs (b)(5), (6), (7),
(9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall
render to the Board of Directors of the Corporation such periodic and special
reports as the Board may reasonably request.
(vi) The Subadviser shall provide the Corporation's Custodian on
each business day with information relating to all transactions
concerning the Fund's assets and shall provide the Manager with such
information upon request of the Manager.
5
<PAGE>
(vii) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the Subadviser
shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors, officers
and employees who may be elected as Directors or officers of the
Corporation to serve in the capacities in which they are elected. Services
to be furnished by the Subadviser under this Agreement may be furnished
through the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Corporation's books and records required to
be maintained by the Subadviser pursuant to paragraph 1(a)(v) hereof and
shall timely furnish to the Manager all information relating to the
Subadviser's services hereunder needed by the Manager to keep the other
books and records of the Corporation required by Rule 31a-1 under the 1940
Act. The Subadviser agrees that all records which it maintains for the
Corporation are the property of the Corporation and the Subadviser will
surrender promptly to the Corporation any of such records upon the
Corporation's request, provided however that the Subadviser may retain a
copy of such records. The Subadviser further agrees to preserve for the
periods prescribed by Rule 31a-2 of the Commission under the 1940 Act any
such records as are required to be maintained by it pursuant to paragraph
1(a)(v) hereof.
2. The Manager shall continue to have responsibility for all services
to be provided to the Corporation pursuant to the Management Agreement and shall
oversee and review the Subadviser's performance of its duties under this
Agreement.
6
<PAGE>
3. The Manager shall compensate the Subadviser for the services
provided and the expenses assumed pursuant to this Subadvisory Agreement, by
paying a fee at an annual rate of .30 of 1% of the Fund's average daily net
assets up to $300 million and .25 of 1% of average daily net assets in excess of
$300 million. This fee will be computed daily and paid monthly.
4. The Subadviser shall not be liable for any error of judgment or for
any loss suffered by the Fund or the Manager in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the
Corporation or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, or by the Manager or the Subadviser at any
time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act) or
upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Subadviser's directors, officers, or employees who may also be a
Director, officer or employee of the Corporation to engage in any other business
or to devote his or her time and attention in part to the management or other
aspects of any business, whether of a similar or a dissimilar
7
<PAGE>
nature, nor limit or restrict the Subadviser's right to engage in any other
business or to render services of any kind to any other corporation, firm,
individual or association.
7. During the term of this Agreement, the Manager agrees to furnish
the Subadviser at its principal office all prospectuses, proxy statements,
reports to stockholders, sales literature or other material prepared for
distribution to shareholders of the Fund or the public, which refer to the
Subadviser in any way, prior to use thereof and not to use material if the
Subadviser reasonably objects in writing five business days (or such other time
as may be mutually agreed) after receipt thereof. Sales literature may be
furnished to the Subadviser hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery.
8. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077, Attention: Secretary; or (2) to the
Subadviser at 466 Lexington Avenue, New York, NY 10017, Attention: President.
9. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict the 1940 Act shall control.
8
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By ______________________________________________
Brian M. Storms
President
JENNISON ASSOCIATES CAPITAL CORPORATION
By ______________________________________________
Karen Kohler
Senior Vice President
e:morrison\agrmts\
jen-ac2.ad
9
<PAGE>
EXHIBIT 99.6(e)
PRUDENTIAL JENNISON SERIES FUND, INC.
(Prudential Jennison Active Balanced Fund)
SUBADVISORY AGREEMENT
Agreement made as of this day of , 1998 between Prudential
Investments Fund Management LLC (PIFM or the Manager), a New York Limited
Liability Corporation, and The Prudential Investment Corporation (PIC), a New
Jersey Corporation.
W I T N E S S E T H
WHEREAS, the Manager has entered into a Management Agreement, dated
, 1998 (the Management Agreement), with Prudential Jennison Series Fund, Inc.
(the Corporation), a Maryland corporation and a diversified, open-end management
investment company registered under the Investment Company Act of 1940 (the 1940
Act), pursuant to which PIFM will act as Manager of the Corporation;
WHEREAS, the shares of common stock of the Corporation are divided into
separate series or portfolios, each of which is established pursuant to a
resolution of the Board of Directors of the Corporation, and the Board of
Directors may from time to time terminate such funds or establish and terminate
additional funds;
<PAGE>
WHEREAS, the Manager has entered into a separate subadvisory agreement for
the Prudential Jennison Active Balanced Fund (the Fund) with Jennison Associates
Capital Corp. (the Subadviser) pursuant to which investment advisory services
will be provided to the Fund except with respect to (i) the management of short-
term assets, including cash, money market instruments and repurchase agreements
and (ii) the lending of portfolio securities;
WHEREAS, the Manager desires to retain PIC to provide investment advisory
services to the Fund with respect to (i) the management of short-term assets,
including cash, money market instruments and repurchase agreements and (ii) the
lending of portfolio securities in connection with the management of the Fund
and PIC is willing to render such investment advisory services;
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Corporation, PIC shall manage the short-term assets and
cash of the Fund, including the purchase, retention and disposition
thereof, in accordance with the Fund's investment objectives, policies and
restrictions as stated in the Prospectus (such Prospectus and Statement of
Additional Information as currently in effect and as amended or
supplemented from time to time, being herein collectively called the
"Prospectus") and subject to the following understandings:
(i) PIC shall provide supervision of the Fund's investments and
determine from time to time what investments and securities will be
2
<PAGE>
purchased, retained, sold or loaned by the Fund, and what portion of the assets
will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, PIC shall act in conformity with the Articles of Incorporation, By-
Laws and Prospectus of the Fund and the Corporation and with the instructions
and directions of the Manager and of the Board of Directors of the Corporation
and will conform to and comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable federal and state laws
and regulations.
(iii) The Subadviser shall advise PIC of the dollar amount of the
Fund's assets that shall be invested in repurchase agreements, money market
instruments or held in cash and advise PIC as to the securities available for
lending and the securities to be recalled from loan.
(iv) Upon receipt of information from the Subadviser as to the amount
of funds available for short-term investment, as described in paragraph
1(a)(iii) above, PIC shall determine the securities to be purchased or sold by
the Fund and will place orders with or through such persons, brokers or dealers
(including but not limited to Prudential Securities Incorporated) to carry out
the policy with respect to brokerage as set forth in the Corporation's
Registration Statement and Prospectus or as the Board of Directors may direct
from time to time. In providing the Fund with investment supervision, it is
recognized that PIC will give primary consideration to securing the most
3
<PAGE>
favorable price and efficient execution. Within the framework of this policy,
PIC may consider the financial responsibility, research and investment
information and other services provided by brokers or dealers who may effect or
be a party to any such transaction or other transactions to which PIC's other
clients may be a party. On occasions when PIC deems the purchase or sale of a
security to be in the best interest of a Fund as well as other clients of PIC,
PIC, to the extent permitted by applicable laws and regulations, may, but shall
be under no obligation to, aggregate the securities to be sold or purchased in
order to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by PIC
in the manner PIC considers to be the most equitable and consistent with its
fiduciary obligations to the Fund, the Corporation and to such other clients.
(v) PIC shall maintain all books and records with respect to the Fund's
portfolio transactions required by subparagraphs (b)(5), (6), (7), (9), (10) and
(11) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to the
Board of Directors of the Corporation such periodic and special reports as the
Board may reasonably request.
(vi) PIC shall provide the Corporation's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets and shall provide the Manager with such information upon request
of the Manager.
4
<PAGE>
(vii) The investment management services provided by PIC hereunder
are not to be deemed exclusive, and PIC shall be free to render similar
services to others.
(b) PIC shall authorize and permit any of its directors, officers and employees
who may be elected as Board of Directors or officers of the Corporation to
serve in the capacities in which they are elected. Services to be
furnished by PIC under this Agreement may be furnished through the medium
of any of such directors, officers or employees.
(c) PIC shall keep the Corporation's books and records required to be
maintained by PIC pursuant to paragraph 1(a)(v) hereof and shall timely
furnish to the Manager all information relating to PIC's services hereunder
needed by the Manager to keep the other books and records of the
Corporation required by Rule 31a-1 under the 1940 Act. PIC agrees that all
records which it maintains for the Corporation are the property of the
Corporation and PIC will surrender promptly to the Corporation any of such
records upon the Corporation's request, provided however that PIC may
retain a copy of such records. PIC further agrees to preserve for the
periods prescribed by Rule 31a-2 of the Commission under the 1940 Act any
such records as are required to be maintained by it pursuant to paragraph
1(a)(v) hereof.
2. The Manager shall continue to have responsibility for all services
to be provided to the Corporation pursuant to the Management Agreement and shall
oversee and review PIC's performance of its duties under this Agreement.
5
<PAGE>
3. The Manager shall reimburse PIC for reasonable costs and expenses
incurred by PIC determined in a manner acceptable to the Manager in furnishing
the services provided in paragraph 1 hereof.
4. PIC shall not be liable for any error of judgment or for any loss
suffered by the Fund or the Manager in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on PIC's part in the performance of its duties or from its
reckless disregard of its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the
Corporation or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, or by the Manager or PIC at any time,
without the payment of any penalty, on not more than 60 days' nor less than 30
days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act) or
upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of PIC's directors, officers, or employees who may also be a Director, officer
or employee of the Corporation to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or a dissimilar nature, nor
6
<PAGE>
limit or restrict PIC's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish
PIC at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of the Fund or the public, which refer to PIC in any way, prior to
use thereof and not to use material if PIC reasonably objects in writing five
business days (or such other time as may be mutually agreed) after receipt
thereof. Sales literature may be furnished to PIC hereunder by first-class or
overnight mail, facsimile transmission equipment or hand delivery.
8. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at Gateway Center Three, Newark, New
Jersey 07102-4077, Attention: Secretary; or (2) to the Subadviser at Prudential
Plaza, 751 Broad Street, 2nd floor, Newark, New Jersey, 07102, Attention: Chief
Investment Officer.
9. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict the 1940 Act shall control.
7
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
By _____________________________________________
Brian M. Storms
President
THE PRUDENTIAL INVESTMENT CORPORATION
By ______________________________________________
Jonathan M. Greene
Senior Vice President
E:MORRISON\AGRMTS\
JEN-ACTBAL.AD
8
<PAGE>
EXHIBIT 99.14(A)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Pre-Effective Amendment No. 1 to Registration Statement
No. 333-38087 on form N-14 of Prudential Jennison Series Fund, Inc. of our
report for Prudential Jennison Growth Fund dated November 4, 1996 and appearing
in the Statement of Additional Information, which is included in such
Registration Statement, and to the reference to us under the heading "Financial
Highlights" for the Prudential Active Balanced Fund appearing in the Prospectus
and Proxy Statement which is also included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
November 18, 1997
<PAGE>
EXHIBIT 99.14(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-14 (the "Registration Statement") of our report dated
November 14, 1997 relating to the financial statements and financial highlights
of Prudential Dryden Fund - Prudential Active Balanced Fund (one of the
portfolios constituting the Prudential Dryden Fund, hereafter referred to as the
"Fund"), which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus and Proxy Statement
which constitutes part of this Registration Statement. We also consent to the
references to us under the headings "Financial Highlights" and "Experts" in such
Prospectus and Proxy Statement.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
November 14, 1997
