<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NOS. 33-61997, 811-7343
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 6 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 7 [X]
(CHECK APPROPRIATE BOX OR BOXES)
PRUDENTIAL JENNISON SERIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE (GC3)
100 MULBERRY STREET, 9TH FLOOR
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 (GC3)
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] Immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[X] on January 23, 1998 pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED. . . SHARES OF COMMON STOCK, PAR VALUE
$.001 PER SHARE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
LOCATION IN PROSPECTUS OF
N-1A GROWTH FUND AND GROWTH & INCOME
ITEM NO. FUND
-------- -------------------------------
PART A
<C> <S> <C>
Item 1. Cover Page......................... Cover Page
Item 2. Synopsis........................... Fund Expenses-Growth Fund; Fund
Expenses-Growth & Income Fund;
Fund Highlights
Item 3. Condensed Financial Information.... Fund Expenses-Growth Fund; Fund
Expenses-Growth & Income Fund;
Financial Highlights; How the
Funds Calculate Performance
Item 4. General Description of Registrant.. Cover Page; Fund Highlights; How
the Funds Invest; General
Information
Item 5. Management of the Fund............. How the Funds are Managed;
General Information; Shareholder
Guide
Item 5A. Management's Discussion of Fund Financial Highlights
Performance........................
Item 6. Capital Stock and Other Securities. Taxes, Dividends and
Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Shareholder Guide; How Each Fund
Offered............................ Values its Shares; How the Funds
are Managed
Item 8. Redemption or Repurchase........... Shareholder Guide; How Each Fund
Values its Shares; General
Information
Item 9. Pending Legal Proceedings.......... Not Applicable
</TABLE>
<TABLE>
<CAPTION>
LOCATION IN PROSPECTUS OF ACTIVE
BALANCED FUND
--------------------------------
<C> <S> <C>
Item 1. Cover Page......................... Cover Page
Item 2. Synopsis........................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information.... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant.. Cover Page; Fund Highlights; How
the Fund Invests; General
Information
Item 5. Management of the Fund............. How the Fund is Managed; General
Information; Shareholder Guide
Item 5A. Management's Discussion of Fund Not Applicable
Performance........................
Item 6. Capital Stock and Other Securities. Taxes, Dividends and
Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Shareholder Guide; How the Fund
Offered............................ Values its Shares; How the Fund
is Managed
Item 8. Redemption or Repurchase........... Shareholder Guide; How the Fund
Values its Shares; General
Information
Item 9. Pending Legal Proceedings.......... Not Applicable
</TABLE>
<PAGE>
PART B
<TABLE>
<CAPTION>
Item 10. Cover Page......................... Cover Page
<C> <S> <C>
Item 11. Table of Contents................. Table of Contents
Item 12. General Information and History... General Information
Item 13. Investment Objectives and Investment Objectives and
Policies.......................... Policies; Investment Restrictions
Item 14. Management of the Fund............ Directors and Officers; Manager
and Subadvisers; Distributor
Item 15. Control Persons and Principal Not Applicable
Holders of Securities.............
Item 16. Investment Advisory and Other Manager and Subadvisers;
Services.......................... Distributor; Custodian, Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices.........................
Item 18. Capital Stock and Other Not Applicable
Securities........................
Item 19. Purchase, Redemption and Pricing
of Securities Purchase and Redemption of Fund
Being Offered.................... Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status........................ Taxes, Dividends and
Distributions
Item 21. Underwriters...................... Distributor
Item 22. Calculation of Performance Data... Performance Information
Item 23. Financial Statements.............. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment.
This Post-Effective Amendment is not intended to amend the Prospectus of
Prudential Jennison Growth Fund and Prudential Jennison Growth & Income Fund
dated January 13, 1997, as supplemented by supplements dated March 1, 1997,
March 17, 1997, May 15, 1997 and September 8, 1997.
<PAGE>
Prudential Jennison Active Balanced Fund
- -------------------------------------------------------------------------------
PROSPECTUS DATED , 1998
- -------------------------------------------------------------------------------
Prudential Jennison Active Balanced Fund (the Fund) is a series of Prudential
Jennison Series Fund, Inc. (the Company), a diversified, open-end, management
investment company. The Fund's investment objective is to achieve total
returns approaching equity returns, while accepting less risk than an all-
equity portfolio, through an actively-managed portfolio of equity securities,
fixed income securities and money market instruments. There can be no
assurance that the Fund's investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies." The Fund's address is
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and
its telephone number is (800) 225-1852.
THE FUND RESERVES THE RIGHT TO BORROW MONEY FOR TEMPORARY, EXTRAORDINARY OR
EMERGENCY PURPOSES OR FOR THE CLEARANCE OF TRANSACTIONS AND IN ORDER TO TAKE
ADVANTAGE OF INVESTMENT OPPORTUNITIES, WHICH MAY BE CONSIDERED SPECULATIVE DUE
TO THE INCREASED COSTS AND EXPENSES INVOLVED.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated , 1998, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL JENNISON ACTIVE BALANCED FUND?
Prudential Jennison Active Balanced Fund is a mutual fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is one of three series
of the Company, which is a diversified, open-end, management investment
company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek to achieve total returns
approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments. The Fund's investments will be
actively shifted among these asset classes in order to capitalize on
intermediate term (i.e., 12 to 18 months) valuation opportunities and to
maximize the Fund's total investment return. There can be no assurance that
the Fund's investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies" at page 10.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
With respect to the equity portion of the Fund, the Fund invests primarily in
common stocks of established companies with growth prospects which are, in the
opinion of the Fund's investment adviser, Jennison Associates Capital Corp.
(Jennison or the investment adviser), underappreciated by the market. These
may include companies that are experiencing important changes in their
business structure and management philosophy. The ability of the investment
adviser to successfully identify these changes will be an important factor in
the Fund's performance record. See "How the Fund Invests--Investment Objective
and Policies" at page 10.
The Fund may invest up to 15% of its total assets in equity securities of
foreign issuers and up to 20% of its total assets in debt securities of
foreign issuers. Investing in securities of foreign companies and countries
involves certain risks and considerations not typically associated with
investments in domestic companies. See "How the Fund Invests--Risk Factors and
Special Considerations of Investing in Foreign Securities" at page 17. The
Fund may commit up to 20% of the value of its total assets to investment
techniques such as dollar rolls, forward rolls and reverse repurchase
agreements. See "How the Fund Invests--Investment Objective and Policies--
Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements" at page 12. The
Fund may invest up to 5% of its total assets in non-investment grade debt
securities or in unrated securities of comparable quality. Non-investment
grade securities are securities rated lower than Baa by Moody's Investors
Service, Inc. or BBB by Standard & Poor's Ratings Group and are commonly known
as "junk bonds." These securities are considered speculative and are subject
to a greater risk of loss of principal and interest than higher rated
securities as well as greater price volatility. See "How the Fund Invests--
Risk Factors Relating to Investing in Debt Securities Rated Below Investment
Grade (Junk Bonds)" at page 17. The Fund also may engage in various hedging
and return enhancement strategies and invest in derivative securities. See
"How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of
Hedging and Return Enhancement Strategies" at page 18. As with an investment
in any mutual fund, an investment in this Fund can decrease in value and you
can lose money.
2
<PAGE>
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
manager of the Company and is compensated by the Fund for its services at an
annual rate of .65 of 1% of average daily net assets of the Fund. As of ,
1997, PIFM served as manager or administrator to investment companies,
including mutual funds, with aggregate assets of approximately $
billion. Jennison furnishes investment advisory services in connection with
the management of the Fund under a Subadvisory Agreement with PIFM. The
Prudential Investment Corporation, which does business under the name
Prudential Investments (PI), invests available cash balances for the Fund
through a joint repurchase agreement account. See "How the Fund is Managed--
Manager" at page 22 and "How the Fund is Managed--Subadvisers" at page 22.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. Prudential Securities is paid a distribution and service fee
with respect to Class A shares which is currently being charged at the annual
rate of .25 of 1% of the average daily net assets of the Class A shares and is
paid a distribution and service fee with respect to Class B and Class C shares
at an annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. Prudential Securities incurs the expense of distributing
the Fund's Class Z shares under a Distribution Agreement with the Company,
none of which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 23.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 29 and "Shareholder
Guide--Shareholder Services" at page 40.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at NAV without any sales
charge. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about Class Z
shares. See "How the Fund Values its Shares" at page 25 and "Shareholder
Guide-- How to Buy Shares of the Fund" at page 29.
3
<PAGE>
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge but, for one year
after purchase, are subject to a CDSC of 1% on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but do not convert to another class.
. Class Z Shares: Sold without an initial or contingent deferred sales
charge to a limited group of investors. Class Z shares
are not subject to any ongoing service or distribution
expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 30.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about selling
their Class Z shares. See "Shareholder Guide--How to Sell Your Shares" at page
34.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 26.
4
<PAGE>
FUND EXPENSES
<TABLE>
<S> <C> <C> <C> <C>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
SHAREHOLDER TRANSACTION EX-
PENSES+
Maximum Sales Load Im-
posed on Purchases (as a
percentage of offering
price).................. 5% None None None
Maximum Deferred Sales
Load (as a percentage of
original purchase price
or redemption proceeds,
whichever is lower)..... None None
5% during the first year, 1% on redemptions
decreasing by 1% annually made within one
to 1% in the fifth and sixth year of purchase
years and 0% the seventh
year*
Maximum Sales Load Im-
posed on Reinvested Div-
idends.................. None None None None
Redemption Fees.......... None None None None
Exchange Fee............. None None None None
<CAPTION>
ANNUAL FUND OPERATING CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
EXPENSES -------------- -------------- -------------- --------------
(as a percentage of average
net assets)
<S> <C> <C> <C> <C>
Management Fees.......... .65% .65% .65% .65%
12b-1 Fees (After Reduc-
tion) .25%++ 1.00% 1.00% None
Other Expenses........... .41% .41% .41% .41%
--- --- --- ---
Total Fund Operating Ex-
penses (After Reduc-
tion)................... 1.31% 2.06% 2.06% 1.06%
==== ==== ==== ====
<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 in-
vestment, assuming (1) 5%
annual return and (2) re-
demption at the end of
each time period:
Class A................. $63 $89 $ $
Class B................. $71 $95 $ $
Class C................. $31 $65 $ $
Class Z................. $11 $34 $ $
You would pay the following
expenses on the same in-
vestment, assuming no re-
demption:
Class A................. $63 $89 $ $
Class B................. $21 $65 $ $
Class C................. $21 $65 $ $
Class Z................. $11 $34 $ $
</TABLE>
The above example is estimated for the current fiscal year and is based on
expenses incurred by Prudential Active Balanced Fund, whose assets were
acquired by the Fund at the commencement of its investment operations on
January 23, 1998. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes
estimated operating expenses of the Fund, such as Directors' and professional
fees, registration fees, reports to shareholders and transfer agency and
custodian (domestic and foreign) fees (but excludes foreign withholding
taxes).
- -------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-
based sales charges (12b-1 fees) on shares of the Fund may not exceed
6.25% of total gross sales, subject to certain exclusions. This 6.25%
limitation is imposed on each class of the Fund rather than on a per
shareholder basis. Therefore, long-term Class B and Class C shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
++Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to
limit its distribution fees with respect to Class A shares of the Fund so
as not to exceed .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending September 30, 1998. See "How the Fund is
Managed--Distributor." Total Fund Operating Expenses would be % absent
this limitation with respect to Class A shares.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS A SHARES)
The following financial highlights for Class A shares for the period ended
September 30, 1997 have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
period indicated. The information has been determined based on data contained
in the financial statements. Further performance information is contained in
the annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-------------
OCTOBER 31,
1996(a)
THROUGH
SEPTEMBER 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $13.40
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...........................................
Net realized and unrealized gain on investment transactions.....
------
Total from investment operations................................
------
LESS DISTRIBUTIONS:
Dividends from net investment income............................
Dividends from net realized gains...............................
------
Total distributions.............................................
Net asset value, end of period.................................. $
======
TOTAL RETURN(C):................................................
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................. $
Average net assets (000)........................................ $
Ratios to average net assets(b):
Expenses, including distribution fees..........................
Expenses, excluding distribution fees..........................
Net investment income..........................................
Portfolio turnover rate.........................................
Average commission rate per share............................... $
</TABLE>
-----------
(a) Commencement of offering of Class A shares of Prudential Active
Balanced Fund, a series of Prudential Index Series Fund (formerly
Prudential Dryden Fund), whose assets and liabilities were acquired
by the Fund, Class A shares for Class A shares, on January 23, 1998.
Immediately prior to this transfer, the Fund had no assets. The Fund
is the accounting survivor to Prudential Active Balanced Fund and,
as such, financial data is shown from October 31, 1996.
(b) Annualized.
(c) 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS B SHARES)
The following financial highlights for Class B shares for the period ended
September 30, 1997 have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
period indicated. The information has been determined based on data contained
in the financial statements. Further performance information is contained in
the annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------
OCTOBER 31,
1996(a)
THROUGH
SEPTEMBER 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................... $13.40
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.........................................
Net realized and unrealized gain on investment transactions...
------
Total from investment operations..............................
------
LESS DISTRIBUTIONS:
Dividends from net investment income..........................
Distributions from net realized gains.........................
------
Total distributions...........................................
------
Net asset value, end of period................................ $
======
TOTAL RETURN(c): ............................................. %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................... $
Average net assets (000)...................................... $
Ratios to average net assets(b):
Expenses, including distribution fees........................ %
Expenses, excluding distribution fees........................ %
Net investment income........................................ %
Portfolio turnover rate....................................... %
Average commission rate per share............................. $
</TABLE>
- -----------
(a) Commencement of offering of Class B shares of Prudential Active Balanced
Fund, a series of Prudential Index Series Fund (formerly Prudential Dryden
Fund), whose assets and liabilities were acquired by the Fund, Class B
shares for Class B shares, on January 23, 1998. Immediately prior to this
transfer, the Fund had no assets. The Fund is the accounting survivor to
Prudential Active Balanced Fund and, as such, financial data is shown from
October 31, 1996.
(b) Annualized.
(c) 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS C SHARES)
The following financial highlights for Class C shares for the period ended
September 30, 1997 have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
period indicated. The information has been determined based on data contained
in the financial statements. Further performance information is contained in
the annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------
OCTOBER 31, 1996(a)
THROUGH
SEPTEMBER 30, 1997
-------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $13.40
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................
Net realized and unrealized gain on investment
transactions............................................
------
Total from investment operations.........................
------
LESS DISTRIBUTIONS:
Dividends from net investment income.....................
Distributions from net realized gains....................
------
Total distributions......................................
------
Net asset value, end of period........................... $
======
TOTAL RETURN(C): ........................................ %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $
Average net assets (000)................................. $
Ratios to average net assets(b):
Expenses, including distribution fees................... %
Expenses, excluding distribution fees................... %
Net investment income................................... %
Portfolio turnover rate.................................. %
Average commission rate per share........................ $
</TABLE>
- -----------
(a) Commencement of offering of Class C shares of Prudential Active Balanced
Fund, a series of Prudential Index Series Fund (formerly Prudential Dryden
Fund), whose assets and liabilities were acquired by the Fund, Class C
shares for Class C shares, on January 23, 1998. Immediately prior to this
transfer, the Fund had no assets. The Fund is the accounting survivor to
Prudential Active Balanced Fund and, as such, financial data is shown from
October 31, 1996.
(b) Annualized.
(c) 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.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights for the year ended September 30, 1997 have
been audited by Price Waterhouse LLP, independent accountants, and for the
years ended September 30, 1996 and for the period from January 4, 1993 through
September 30, 1993 have been audited by Deloitte & Touche LLP, Independent
auditors, whose reports thereon were unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class Z share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
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
(b)..................... .29 .33 .24 .21
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions............ .81 1.54 (.12) .84
------ -------- -------- ------- -------
Total from investment
operations.............. 1.10 1.87 .12 1.05
====== ======== ======== ======= =======
LESS DISTRIBUTIONS:
Dividends from net
investment income....... (.37) (.29) (.14) --
Dividends from net
realized income......... (.18) (.04) (.11) --
------ -------- -------- ------- -------
Total distributions...... (.55) (.33) (.25) --
------ -------- -------- ------- -------
Net asset value, end of
period.................. $ $ 13.01 $ 12.46 $ 10.92 $ 11.05
====== ======== ======== ======= =======
TOTAL RETURN(D): ........ 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ $153,588 $133,352 $81,176 $38,786
Average net assets (000). $ $142,026 $104,821 $58,992 $12,815
Ratios to average net
assets(b):
Expenses................ % 1.00% 1.00% 1.00% 1.00%(c)
Net investment income... % 3.09% 3.53% 3.06% 2.68%(c)
Portfolio turnover rate.. % 51% 30% 40% 47%
Average commission rate
per share............... $ $ 0.0654 N/A N/A N/A
</TABLE>
- -----------
(a) Commencement of investment operations of Prudential Active Balanced Fund,
a series of Prudential Index Series Fund (formerly Prudential Dryden
Fund), whose assets and liabilities were acquired by the Fund, Class Z
shares for Class Z shares, on January 23, 1998. Immediately prior to this
transfer, the Fund had no assets. The Fund is the accounting survivor to
Prudential Active Balanced Fund and, as such, financial data is shown from
January 4, 1993.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and other distributions. Total return for
periods of less than a full year are not annualized. Total return includes
the effect of expense subsidies.
9
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TO ACHIEVE TOTAL RETURNS
APPROACHING EQUITY RETURNS, WHILE ACCEPTING LESS RISK THAN AN ALL-EQUITY
PORTFOLIO, THROUGH AN ACTIVELY-MANAGED PORTFOLIO OF EQUITY SECURITIES, FIXED
INCOME SECURITIES AND MONEY MARKET INSTRUMENTS. THERE CAN BE NO ASSURANCE THAT
THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information. As with an investment in
any mutual fund, an investment in this Fund can decrease in value and you can
lose money.
Jennison, the investment adviser to the Fund, uses the following ranges as
the normal operating parameters for the securities to be purchased by the
Fund: (i) 40-75% of the total assets of the Fund will be invested in common
stocks, preferred stocks and other equity-related securities; (ii) 25-60% of
the total assets of the Fund will be invested in investment grade fixed income
securities; and (iii) 0-35% of the total assets of the Fund will be invested
in money market instruments. Within these parameters, at least 25% of the
Fund's total assets will be invested in fixed income senior securities.
The Fund's investments will be actively shifted among these asset classes in
order to capitalize on intermediate term (i.e., 12 to 18 months) valuation
opportunities and to maximize the Fund's total investment return. The equity
component of the Fund will be invested in the common stocks, preferred stocks
and other equity-related securities of companies that are expected to generate
superior earnings growth or are attractively valued. The fixed income
component of the Fund will be invested primarily in fixed income securities
rated A or better by Moody's Investors Service, Inc. (Moody's) or Standard &
Poor's Ratings Group (S&P Ratings) (or the equivalent rating of another
nationally recognized statistical rating organization (NRSRO)) or, if not
rated, determined by Jennison to be of comparable quality to securities so
rated. However, the Fund also may invest up to 20% of the fixed income portion
of its portfolio in securities rated Baa/BBB (or the equivalent rating of
another NRSRO) or, if not rated, determined by Jennison to be of comparable
quality to securities so rated. The weighted average maturity of the fixed
income component of the Fund will normally be between 5 and 25 years.
Under normal market conditions at least 65% of the value of the Fund's total
assets will be invested according to the above allocations. Within these
allocations, the Fund's assets may be invested as follows: (i) up to 15% of
the Fund's total assets, in common stocks, preferred stocks and other equity-
related securities of foreign issuers; (ii) up to 20% of the Fund's total
assets, in investment grade fixed income securities of foreign issuers; (iii)
in mortgage-backed securities; (iv) in custodial receipts and asset-backed
securities; and (v) in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement, the Fund may:
(i) enter into repurchase agreements, when-issued, delayed delivery and
forward commitment transactions; (ii) lend its portfolio securities; (iii)
purchase and sell put and call options on securities, stock indices and
interest rate indices; (iv) purchase and sell futures contracts on stock
indices and interest rate indices and options thereon; and (v) purchase and
sell futures contracts on securities.
The Fund also may: (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and currency forward contracts;
and (iii) purchase and sell put and call options on currencies and on foreign
currency futures contracts, in each case to attempt to reduce risks associated
with currency fluctuations.
The Fund reserves the right as a defensive measure to hold temporarily other
types of securities without limit, including high quality commercial paper,
bankers' acceptances, non-convertible debt securities (corporate and
government) or government and high quality money market securities of U.S. and
non-U.S. issuers, or cash (foreign currencies or U.S.
10
<PAGE>
dollars), in such proportions as, in the opinion of Jennison, prevailing
market, economic or political conditions warrant. The Fund may also
temporarily hold cash and invest in high quality foreign or domestic money
market instruments pending investment of proceeds from new sales of Fund
shares or to meet ordinary daily cash needs. See "Other Investments and
Policies" below.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND THEREFORE MAY NOT
BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940 (THE INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS OF THE COMPANY.
EQUITY-RELATED SECURITIES
The Fund may invest in equity-related securities. Equity-related securities
include common stocks, preferred stocks, securities convertible or
exchangeable for common stocks or preferred stocks, equity investments in
partnerships, joint ventures and other forms of non-corporate investments,
American Depositary Receipts 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 "Risk Factors Relating
to Investing in Debt Securities Rated Below Investment Grade (Junk Bonds)"
below.
In recent years, convertible securities have been developed which combine
higher or lower current income with options and other features. The Fund may
invest in these types of convertible securities.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--U.S. Government Securities" in the
Statement of Additional Information.
11
<PAGE>
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in investment grade corporate and other debt obligations
of domestic and foreign issuers, including convertible securities and money
market instruments. See "Money Market Instruments" below. Bonds and other debt
securities are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Investment grade debt securities are rated within the
four highest quality grades as determined by Moody's (currently Aaa, Aa, A and
Baa for bonds), or S&P Ratings (currently AAA, AA, A and BBB for bonds), or by
another NRSRO, or in unrated securities which are of equivalent quality in the
opinion of Jennison. Securities rated Baa by Moody's, although considered to
be investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Such lower
rated securities are subject to a greater risk of loss of principal and
interest.
NON-INVESTMENT GRADE FIXED INCOME SECURITIES
Up to 5% of the total assets of the Fund may be invested in non-investment
grade fixed income securities, including convertible securities. See
"Convertible Securities, Warrants and Rights" below. Non-investment grade
fixed income securities (those rated below Baa by Moody's or BBB by S&P
Ratings or comparably rated by another NRSRO or unrated securities determined
by Jennison to be of comparable quality) have speculative characteristics
(including the possibility of default or bankruptcy of the issuers of such
securities, market price volatility based upon interest rate sensitivity,
questionable creditworthiness and relative liquidity of the secondary trading
market). Because these securities have been found to be more sensitive to
adverse economic changes or individual corporate developments and less
sensitive to interest rate changes than higher-rated investments, an economic
downturn could disrupt the market for these securities and adversely affect
the value of these securities and the ability of issuers to repay principal
and interest. See "Risk Factors Relating to Investing in Debt Securities Rated
Below Investment Grade (Junk Bonds)" below.
SECURITIES OF FOREIGN ISSUERS
The Fund 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 Fund may purchase American Depositary Receipts (ADRs), which
are U.S. dollar-denominated certificates issued by a U.S. bank or trust
company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a U.S. bank and traded on a
U.S. exchange or in an over-the-counter market. Generally, ADRs are in
registered form. There are no fees imposed on the purchase or sale of ADRs
when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges
for the collection of dividends and the conversion of ADRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment
in the underlying foreign securities since: (i) ADRs are U.S. dollar-
denominated investments that are registered domestically, easily transferable,
and for which market quotations are readily available; and (ii) issuers whose
securities are represented by ADRs are usually subject to comparable auditing,
accounting and financial reporting standards as domestic issuers.
FORWARD ROLLS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Fund may commit up to 20% of the value of its total assets to investment
techniques such as dollar rolls, forward rolls and reverse repurchase
agreements. A forward roll is a transaction in which the Fund sells a security
to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase the same or similar security from the
institution at a later date at an agreed upon price. With respect to mortgage-
related securities, such transactions are often called "dollar rolls." In
dollar roll transactions, the mortgage-related securities that are repurchased
will bear the same coupon rate as those sold, but generally will be
collateralized by different pools of mortgages with different prepayment
histories than those sold. During the roll period, the Fund forgoes principal
and interest paid on the securities and is
12
<PAGE>
compensated by the difference between the current sales price and the forward
price for the future purchase as well as by interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar
roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of
the dollar roll transaction.
Reverse repurchase agreements involve sales by the Fund of portfolio
securities to a financial institution concurrently with an agreement by the
Fund to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Fund continues to receive
principal and interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the Fund with the
proceeds of the initial sale may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement, forward roll or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligations to repurchase the securities. The staff of the Securities and
Exchange Commission (SEC) has taken the position that reverse repurchase
agreements, forward rolls and dollar rolls are to be treated as borrowings.
The Company expects that under normal conditions most of the borrowings of the
Fund will consist of such investment techniques rather than bank borrowings.
See "Other Investments and Policies--Borrowing" below.
CUSTODIAL RECEIPTS
The Fund may acquire custodial receipts or certificates, such as CATS, TIGRs
and FICO Strips, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies or
instrumentalities. The underwriters of these certificates or receipts
generally purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the periodic
unmatured coupon payments and the final principal payment on the U.S.
Government security. Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero coupon U.S.
Government securities but are not U.S. Government securities and are neither
insured nor guaranteed by the U.S. Government.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent interests in pools of mortgages.
Principal and interest payments made on the mortgages in the pools are passed
through to the holder of such securities. Payment of principal and interest on
some mortgage-backed securities (but not the market value of the securities
themselves) may be guaranteed by the full faith and credit of the U.S.
Government, or guaranteed by agencies or instrumentalities of the U.S.
Government. Mortgage-backed securities created by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers) may
be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance, and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.
Mortgage-backed securities include collateralized mortgage obligations
(CMOs), which are obligations fully collateralized by the portfolio of
mortgaged or mortgage-related securities. Payments of principal and interest
on the mortgages are passed through to the holders of the CMO as they are
received, although certain classes of CMOs have priority over others for
receipt of mortgage prepayments. Typically, CMOs are collateralized by
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)
Certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (referred to below as Underlying Assets).
13
<PAGE>
CMOs may be issued by agencies or instrumentalities of the U.S. Government,
or by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special-purpose
subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be
treated as a Real Estate Mortgage Investment Conduit (REMIC).
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Underlying Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Underlying Assets may be allocated among the several classes of a CMO series
in a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual tranches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time
of issuance compared to prevailing market yields on mortgage-backed
securities.
Unscheduled or early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Like other fixed income securities, when interest
rates rise, the value of a mortgage-related security generally will decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other fixed
income securities.
ASSET-BACKED SECURITIES
The Fund may purchase asset-backed securities that represent either
fractional interests or participations in pools of leases, retail installment
loans, or revolving credit receivables held by a trust or limited purpose
finance subsidiary. Such asset-backed securities may be secured by the
underlying assets (such as certificates for automobile receivables) or may be
unsecured (such as credit card receivable securities). Depending on the
structure of the asset-backed security, monthly or quarterly payments of
principal and interest or interest only are passed-through or paid through to
certificate holders. Asset-backed securities may be guaranteed up to certain
amounts by guarantees, insurance, or letters of credit issued by a financial
institution affiliated or unaffiliated with the originator of the pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage pass-
through securities), which may shorten the securities' weighted average life
and reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, the security interests in the underlying automobiles are often
not transferred when the pool is created, with the resulting possibility that
the collateral could be resold.
Unlike traditional fixed income securities, interest and principal payments
on asset-backed securities are made more frequently, usually monthly, and
principal may be prepaid at any time. As a result, if the Fund purchases such
a security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively,
if the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce
yield to maturity. Certificate holders may also experience delays in payment
if the full amounts due on underlying loans, leases or receivables are not
realized because of unanticipated legal or administrative costs of enforcing
the contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. If consistent with
14
<PAGE>
its investment objective and policies, the Fund may invest in other asset-
backed securities that may be developed in the future.
TYPES OF CREDIT ENHANCEMENT. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations
of a number of different parties. To lessen the effect of failures by obligors
on underlying assets to make payments, those securities may contain elements
of credit support, which fall into two categories: (i) liquidity protection
and (ii) protection against losses resulting from ultimate default by an
obligor on the underlying assets. Liquidity protection refers to the provision
of advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
This protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Fund will not pay any fees for credit support,
although the existence of credit support may increase the price of a security.
LIQUIDITY PUTS
The Fund may purchase instruments together with the right to resell the
instruments at an agreed-upon price or yield, within a specified period prior
to the maturity date of the instruments. This instrument is commonly known as
a "liquidity put" or a "tender option bond."
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic
and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. The Fund may invest in money market instruments without
limit for temporary defensive and cash management purposes. To the extent the
Fund otherwise invests in money market instruments, it is subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks or through forward
rolls, dollar rolls or reverse repurchase agreements to take advantage of
investment opportunities, for temporary, extraordinary or emergency purposes
or for the clearance of transactions. The Fund may pledge up to 20% of its
total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. The Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of its total assets. See "Investment Objectives and
Policies--Borrowing" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and
15
<PAGE>
privately placed commercial paper that have a readily available market are not
considered illiquid for purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. The Fund's investment in Rule 144A securities could
have the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a limited time, uninterested in purchasing
Rule 144A securities. See "Investment Restrictions" in the Statement of
Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss. The Fund may participate in a joint
repurchase account managed by PI. See "Investment Objectives and Policies--
Repurchase Agreements" in the Statement of Additional Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Fund will only purchase securities on
a when-issued or delayed delivery basis with the intention of acquiring the
securities, the Fund may sell the securities before the settlement date, if it
is deemed advisable. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record
the transaction and thereafter reflect the value, each day, of such security
in determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash or other
liquid assets having a value equal to or greater than the Fund's purchase
commitments. Subject to this requirement, the Fund may purchase securities on
such basis without limit. See "Investment Objectives and Policies--When-Issued
and Delayed Delivery Securities" in the Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As with
any extensions of credit, there are risks of delay in recovery and in some
cases loss of rights in the collateral should the borrower of the securities
fail financially. As a matter of fundamental policy, the Fund cannot lend more
than 30% of the value of its total assets. See "Investment Objectives and
Policies--Lending of Securities" in the Statement of Additional Information.
The Fund may pay reasonable administration and custodial fees in connection
with a loan.
SEGREGATED ACCOUNTS. The Fund will establish a segregated account with its
Custodian, State Street Bank and Trust Company (State Street), in which it
will maintain cash, U.S. Government securities, equity securities or other
liquid,
16
<PAGE>
unencumbered assets equal in value to its obligations in respect of
potentially leveraged transactions, including forward contracts, when-issued
and delayed delivery securities, repurchase and reverse repurchase agreements,
forward rolls, dollar rolls, futures contracts, written options and options on
futures contracts (unless otherwise covered). The assets deposited in the
segregated account will be marked-to-market daily.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBLE IMPOSITION OF EXCHANGE
CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject
to greater fluctuations in price than securities issued by U.S. corporations
or issued or guaranteed by the U.S. Government, its instrumentalities or
agencies. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic companies. There is
generally less government regulation of securities exchanges, brokers and
listed companies abroad than in the United States and there is a possibility
of expropriation, confiscatory taxation or diplomatic developments which could
affect investment.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than U.S. brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. The Fund may, but need not, enter into forward foreign currency
exchange contracts, options on foreign currencies and futures contracts on
foreign currencies and related options, for hedging purposes, including:
locking-in the U.S. dollar price of the purchase or sale of securities
denominated in a foreign currency; locking-in the U.S. dollar equivalent of
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)
The Fund may invest up to 5% of its total assets in non-investment grade debt
securities, including convertible securities. Fixed income securities are
subject to the risk of an issuer's inability to meet principal and interest
payments 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
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and credit risk than are more highly rated securities, which react primarily
to movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities and, from
time to time, it may be more difficult to value high yield securities than
more highly rated securities. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices in calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the debt portion of its
portfolio and increasing the exposure of the Fund to the risks of high yield
securities.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high
yield bonds. These types of laws could adversely affect the Fund's net asset
value and investment practices, the secondary market for high yield
securities, the financial condition of issuers of these securities and the
value of outstanding high yield securities. There is currently no legislation
pending that would adversely impact the market for junk bonds. However, there
can be no assurance that such legislation will not be proposed or enacted in
the future.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. THE FUND, AND THUS
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 Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Investment
Objectives and Policies" and "Taxes, Dividends and Distributions" in the
Statement of Additional Information. Jennison does not intend to buy all of
these instruments or use all of these strategies to the full extent permitted
unless it believes that doing so will help the Fund achieve its objective. New
financial products and risk management techniques continue to be developed and
the Fund may use these new investments and techniques to the extent consistent
with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON ANY
SECURITIES IN WHICH IT MAY INVEST OR OPTIONS ON ANY SECURITIES INDEX BASED ON
SECURITIES IN WHICH THE FUND MAY INVEST. THESE OPTIONS ARE TRADED ON U.S. OR
FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO HEDGE ITS
PORTFOLIO. The Fund may write covered put and call options to generate
additional income through the receipt of premiums, purchase put options in an
effort to protect the value of securities (or currencies) that it owns against
a decline in market value and purchase call options in an effort to protect
against an increase in the price of securities (or currencies) it intends to
purchase. The Fund may also
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purchase put and call options to offset previously written put and call
options of the same series. See "Investment Objectives and Policies--Options
on Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES, SECURITIES IN THE
INDEX OR CURRENCY SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE
PRICE OR STRIKE PRICE). The writer of a call option, in return for the
premium, has the obligation, upon exercise of the option, to deliver,
depending upon the terms of the option contract, the underlying securities or
a specified amount of cash to the purchaser upon receipt of the exercise
price. When the Fund writes a call option, the Fund gives up the potential for
gain on the underlying securities or currency in excess of the exercise price
of the option during the period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains in a
segregated account cash or other liquid assets in an amount equal to or
greater than its obligation under the option. Under the first circumstance,
the Fund's losses are limited because it owns the underlying security or
currency; under the second circumstance, in the case of a written call option,
the Fund's losses are potentially unlimited. See "Investment Objectives and
Policies--Options on Securities" in the Statement of Additional Information.
There is no limitation on the amount of options the Fund may write.
The Fund would normally purchase put options to hedge against a decline in
the market value of securities in its portfolio (protective puts). The
purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price, upon exercise of the
option, during the option period. Gains and losses on the purchase of
protective puts would tend to be offset by countervailing changes in the value
of underlying Fund securities. The Fund would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreases
below the exercise price sufficiently to cover the premium and transaction
costs; otherwise, the Fund would realize a loss on the purchase of the put
option. The Fund may also write a call option, which can serve as a limited
short hedge because decreases in value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security appreciates to a price higher than the exercise price of the
call option, it can be expected that the option will be exercised and the Fund
will be obligated to sell the security at less than its market value.
The Fund may purchase and sell put and call options on securities indices for
hedging against a decline in the value of the securities owned by the Fund or
against an increase in the market value of the type of securities in which the
Fund may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the
actual purchase or sale of securities. When purchasing or selling securities
index options, the Fund is subject to the risk that the value of its portfolio
securities may not change as much as or more than the index because the Fund's
investments generally will not match the composition of the index. See
"Investment Objectives and Policies--Options on Securities" and "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN
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IN ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). THE FUND, 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 Fund may purchase and sell futures
contracts or related options as a hedge against changes in market conditions.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If the Fund does not hold
the security or currency underlying the futures contract, the Fund will be
required to segregate on an ongoing basis with its Custodian cash or other
liquid assets in an amount at least equal to the Fund's obligations with
respect to such futures contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies underlying the futures contract is imperfect and there is a
risk that the value of the indices or currencies underlying the futures
contract may increase or decrease at a greater rate than the related futures
contracts resulting in losses to the Fund. Certain futures exchanges or boards
of trade have established daily limits on the amount that the price of futures
contracts or related options may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict the Fund's ability to
purchase or sell certain futures contracts or related options on any
particular day.
The Fund's ability to enter into and close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company. See "Investment Objectives
and Policies" and "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES AND MAY PURCHASE AND SELL FOREIGN CURRENCY FORWARD
CONTRACTS, FUTURES CONTRACTS ON FOREIGN CURRENCY, AND OPTIONS ON FUTURES
CONTRACTS ON FOREIGN CURRENCY TO PROTECT AGAINST THE EFFECT OF ADVERSE CHANGES
ON FOREIGN CURRENCIES. The Fund may enter into such contracts on a spot, i.e.,
cash, basis at the rate then prevailing in the currency exchange market or on
a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract. These contracts are traded in the market
conducted directly between currency traders (typically large commercial banks)
and their customers. See "Investment Objectives and Policies--Risks Related to
Forward Foreign Currency Exchange Contracts" in the Statement of Additional
Information.
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THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING INVOLVING
EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. When the Fund invests in
foreign securities, it may enter into forward contracts in several
circumstances to protect the value of its assets. The Fund may not use forward
contracts, options on foreign currencies, futures contracts on foreign
currencies and options on such contracts in order to generate income, although
the use of such contracts may incidentally generate income. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of foreign currency)
of the securities being hedged. See "Investment Objectives and Policies" in
the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of options,
foreign currency and futures contracts and options on futures contracts
include (1) dependence on the investment adviser's ability to predict
correctly movements in the direction of interest rates, securities prices and
currency markets; (2) imperfect correlation between the price of options and
futures contracts and options thereon and movements in the prices of the
securities or currencies being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; and (6) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need
for the Fund to sell a portfolio security at a disadvantageous time, due to
the need for the Fund to maintain "cover" or to segregate securities in
connection with hedging transactions. See "Taxes, Dividends and Distributions"
in the Statement of Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if the investment adviser
believes that the other party to options will continue to make a market for
such options. However, there can be no assurance that a liquid secondary
market will continue to exist or that the other party will continue to make a
market. Thus, it may not be possible to close an options or futures
transaction. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an
open position in an option, a futures contract or related option.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE COMPANY HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISERS AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY
BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISERS FURNISH DAILY
INVESTMENT ADVISORY SERVICES.
For the periods ended September 30, 1997, the Fund's annualized total
expenses as a percentage of average net assets for the Fund's Class A, Class B,
Class C and Class Z shares were , , and , respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE COMPANY AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF
.65 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS. It was established as a New
York limited liability company in 1996. See "Manager and Subadvisers" in the
Statement of Additional Information.
As of December 31, 1997, PIFM served as the manager to open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to closed-end investment companies, with aggregate assets of
approximately $ billion.
Under a Management Agreement with the Company, PIFM manages the investment
operations of the Fund and also administers the Fund's business affairs. See
"Manager and Subadvisers" in the Statement of Additional Information.
SUBADVISERS
JENNISON ASSOCIATES CAPITAL CORP. (JENNISON, THE SUBADVISER OR THE INVESTMENT
ADVISER), 466 LEXINGTON AVENUE, NEW YORK, NEW YORK, 10017, IS THE SUBADVISER TO
THE COMPANY. It was incorporated in 1969 under the laws of the State of New
York. As of September 30, 1997, Jennison had over $38 billion in assets under
management for institutional and mutual fund clients.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PIFM, JENNISON FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND 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.
Under the Subadvisory Agreement, Jennison, subject to the supervision of
PIFM, is responsible for managing the assets of the Fund in accordance with its
investment objective, investment program and policies. Jennison determines what
securities and other instruments are purchased and sold for the Fund and is
responsible for obtaining and evaluating financial data relevant to the Fund.
BRADLEY GOLDBERG IS THE PORTFOLIO MANAGER AND PETER REINEMANN AND G. TODD
SILVA ARE ASSOCIATE PORTFOLIO MANAGERS OF THE FUND. Mr. Goldberg is an
Executive Vice President of Jennison, and is responsible for the day-to-day
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<PAGE>
management of the Fund. Mr. Goldberg has managed Prudential Active Balanced
Fund, whose assets were acquired by the Fund, since the series' inception in
January 1993 and has been employed as a portfolio manager at Jennison since
1974. Mr. Goldberg also serves as the portfolio manager of the Prudential
Jennison Growth & Income Fund, another series of the Company. Mr. Reinemann, a
Senior Vice President and Director, joined Jennison in 1992 as an associate
portfolio manager. Prior to that time, he served as a Vice President at
Paribas Asset Management, Inc. Mr. Reinemann also serves as an Associate
Portfolio Manager for Prudential Jennison Growth Fund. Mr. Silva, a Senior
Vice President of Jennison, joined Jennison in June 1996. He was previously a
Vice President and assistant portfolio manager in the Growth & Income Group at
Scudder, Stevens & Clark Inc. and an equity analyst at Putnam Investments. Mr.
Reinemann and Mr. Silva are also Associate Portfolio Managers of the
Prudential Jennison Growth & Income Fund.
THE PRUDENTIAL INVESTMENT CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL
INVESTMENTS (PI), 751 BROAD STREET, NEWARK, NEW JERSEY 07102, INVESTS
AVAILABLE CASH BALANCES FOR THE FUND THROUGH A JOINT REPURCHASE AGREEMENT
ACCOUNT. The Manager reimburses PI for the reasonable costs and expenses it
incurs in providing such services.
PIFM, Jennison and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE
DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND.
IT IS AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. Prudential
Securities also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of which is reimbursed by or paid for
by the Fund. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer,
commissions and account servicing fees paid to, or on account of, other
broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the
sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. Prudential Securities has
agreed to limit its distribution-related fees payable under the Class A Plan
to .25 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending September 30, 1998.
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UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
The Fund records all payments made under the Plans as expenses in the
calculation of net investment income. See "Distributor" in the Statement of
Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class C
shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B or Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Directors of the Company, including a majority
of the Directors who are not "interested persons" of the Company (as defined
in the Investment Company Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan
(the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan may
be terminated at any time by vote of a majority of the Rule 12b-1 Directors or
of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any Plan if it
is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments to dealers (including Prudential Securities) and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purposes of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal
24
<PAGE>
securities laws. An agreement was simultaneously filed to defer prosecution of
these charges for a period of three years from the signing of the agreement,
provided that PSI complies with the terms of the agreement. If, upon
completion of the three year period, PSI has complied with the terms of the
agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling (800)225-1852.
The Company is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street, an independent custodian,
are separate and distinct from PSI.
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 Fund. In addition,
PSI has agreed to limit its distribution fee for the Class A shares as
described above under "Distributor." Fee waivers and expense subsidies will
increase total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Company.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
25
<PAGE>
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Company's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, which will differ by
approximately the amount of any distribution and/or service fee expense
accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The total return shows how much an
investment in the Fund would have increased (decreased) over a specified
period of time (i.e., one, five or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average
annual total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The yield refers
to the income generated by an investment in the Fund over a one-month or 30-
day period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage
of the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information will be contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND INTENDS TO ELECT TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT
TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND NET CAPITAL GAINS, IF
ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
26
<PAGE>
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized by the Fund. See "Taxes, Dividends and Distributions"
in the Statement of Additional Information.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts).
At the end of each year, such investments held by the Fund will be required to
be "marked-to-market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
The Fund may incur foreign income taxes in connection with some of its
foreign investments.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income. The maximum long-term capital gains rate for individual
shareholders is currently 28% and for securities held more than 18 months is
20%. The maximum tax rate for individual shareholders for ordinary income is
39.6%.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of 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.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds 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.
27
<PAGE>
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND TO
MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL
LOSSES AT LEAST ANNUALLY. Dividends paid by the Fund with respect to each
class of shares, to the extent any dividends are paid, will be calculated in
the same manner, at the same time, on the same day and will be in the same
amount except that each class other than Class Z will bear its own
distribution and/or service fee charges, generally resulting in lower
dividends for Class B and Class C shares in relation to Class A and Class Z
shares and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount
per share for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
adviser to elect to receive dividends and distributions in cash.
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 FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE COMPANY WAS INCORPORATED IN MARYLAND ON AUGUST 10, 1995. THE COMPANY IS
AUTHORIZED TO ISSUE 3 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO THREE SERIES OR PORTFOLIOS: THE FUND, PRUDENTIAL JENNISON
GROWTH FUND AND PRUDENTIAL JENNISON GROWTH & INCOME FUND. THE FUND IS FURTHER
DIVIDED INTO FOUR CLASSES OF SHARES, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z. Each class of Common Stock of the Fund represents an interest in the
same assets of the Fund and is identical in all respects except that (i) each
class is subject to different sales charges and distribution and/or service
fees (except for Class Z shares, which are not subject to any sales charges
and distribution and/or service fees), which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class of the Fund, (iii) each class has a different
exchange privilege, (iv) only Class B shares have a conversion feature and (v)
Class Z shares are offered exclusively for sale to a limited group of
investors. See "How the Fund is Managed--Distributor." In accordance with the
Company's Articles of Incorporation, the Board of Directors may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Board may determine.
The Company's expenses generally are allocated among the Funds on the basis
of relative net assets at the time of allocation, except that expenses
directly attributable to the Fund or the other series of the Company are
charged to the Fund or the other series, as the case may be.
28
<PAGE>
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class is equal as to earnings, assets and voting
privileges, except as noted above, and each class bears the expenses related
to the distribution of its shares (with the exception of Class Z shares, which
are not subject to any distribution or service fees). Except for the
conversion feature applicable to the Class B shares, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each
share of the Fund is entitled to its portion of all of the Fund's assets after
all debts and expenses of the Fund have been paid. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees. The Company's shares do not
have cumulative voting rights for the election of Directors.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS
OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO
BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS
HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10%
OR MORE OF THE COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Company with the SEC
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The offering price
is the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at NAV without any sales charge.
Payment may be made by wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
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. See "Shareholder Services" below.
29
<PAGE>
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you
to your bank to transfer funds by wire to State Street Bank and Trust Company,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential 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 class in which you are eligible to invest (Class A, Class
B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential 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.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGES NET ASSETS) OTHER INFORMATION
------------------------------------------ ------------------------------------- ----------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or
the public offering price being charged at a rate of .25 of 1%) reduced for certain purchases
Class B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after purchase
the amount invested or the redemption
proceeds; declines to zero after six years
Class C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another class
of the amount invested or the
redemption proceeds on redemptions
made within one year of purchase
Class Z None None Sold to a limited group of investors
</TABLE>
30
<PAGE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any
distribution or service fees) bears the separate expenses of its Rule 12b-1
distribution and service plan, (ii) each class has exclusive voting rights on
any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class,
and (iii) only Class B shares have a conversion feature. The four classes also
have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares
of each class will be reduced by the amount of the distribution fee (if any)
of each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of
any applicable sales charge (whether imposed at the time of purchase or
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature-- Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in net asset value, the effect of
the return on the investment over this period of time or redemptions during
which the CDSC is applicable.
31
<PAGE>
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction
and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed
as a percentage of the offering price and of the amount invested) as shown in
the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000....... 5.00% 5.26% 4.75%
$25,000 to $49,999...... 4.50 4.71 4.25
$50,000 to $99,999...... 4.00 4.17 3.75
$100,000 to $249,999.... 3.25 3.36 3.00
$250,000 to $499,999.... 2.50 2.56 2.40
$500,000 to $999,999.... 2.00 2.04 1.90
$1,000,000 and above.... None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee 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 the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or
Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by
participants who are repaying loans made from such plans to the participant.
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 Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under
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Sections 457 or 403(b)(7) of the Internal Revenue Code and plans that
participate in the Transfer Agent's PruArray and SmartPath Programs (benefit
plan recordkeeping services) (hereafter referred to as a PruArray or SmartPath
Plan). All plans of a company for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold. The term "existing assets" as used herein includes stock issued by
a plan sponsor, shares of Prudential Mutual Funds and shares of certain
unaffiliated mutual funds that participate in the PruArray or SmartPath
Program (Participating Funds). "Existing assets" also include monies invested
in The Guaranteed Interest Account (GIA), a group annuity insurance product
issued by Prudential, and units of the Stable Value Fund (SVF), an
unaffiliated bank collective fund. 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 the Fund), (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.
You must notify the transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement.
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<PAGE>
No initial sales charges are imposed upon Class A shares acquired upon the
reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, Prudential Securities or Prusec.
Although there is no sales charge imposed at the time of purchase, redemption
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of
sale from its own resources. This facilitates the ability of the Fund to sell
the Class B shares without an initial sales charge being deducted at the time
of purchase. The Distributor anticipates that it will recoup its advancement
of sales commissions from the combination of the CDSC and the distribution
fee. See "How the Fund is Managed--Distributor." In connection with the sale
of Class C shares, the Distributor will pay dealers, financial advisers and
other persons which distribute Class C shares a sales commission of up to 1%
of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are currently available for purchase by the following
categories of investors:(i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans), provided such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets;
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B.(or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (iii) certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by Prudential, for whom Class Z shares
of the Prudential Mutual Funds are an available investment option; (iv)
Benefit Plans for which Prudential Retirement Services serves as recordkeeper
and as of September 20, 1996 (a) were Class Z shareholders of the Prudential
Mutual Funds or (b) executed a letter of intent to purchase Class Z shares of
the Prudential Mutual Funds; (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund); and (vi) employees of Prudential
and/or Prudential Securities who participate in a Prudential-sponsored
employee savings plan.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares."
In certain cases, however, redemption proceeds will be reduced by the amount
of any applicable contingent deferred sales charge (CDSC), as described below.
See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
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<PAGE>
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates signed in the names(s) shown on the face of the
certificates, must be received by the Transfer Agent in order for the
redemption request to be processed. If redemption is requested by a
corporation, partnership, trust or fiduciary, written evidence of authority
acceptable to the Transfer Agent must be submitted before such request will be
accepted. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Prudential
Preferred Financial Services offices. In the case of redemptions from a
PruArray or SmartPath Plan, if the proceeds of the redemption are invested in
another investment option of the plan, in the name of the record holder and at
the same address as reflected in the Transfer Agent's record, a signature
guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the SEC, by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE
OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as a regular redemption. See "How the Fund Values
its Shares." If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The Company has, however, elected to
be governed by Rule 18f-1 under the Investment Company Act, under which the
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund during the 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No CDSC will
be imposed on any such involuntary redemption.
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90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal income tax treatment of any gain realized upon redemption.
However, if the redemption was made within a 30 day period of the repurchase
and if the redemption results in a loss, some or all of the loss, depending on
the amount reinvested, may not be allowed for federal income tax purposes. See
"Taxes, Dividends and Distributions" in the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to CDSC. The amount of any CDSC will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First.......................................... 5.0%
Second......................................... 4.0%
Third.......................................... 3.0%
Fourth......................................... 2.0%
Fifth.......................................... 1.0%
Sixth.......................................... 1.0%
Seventh........................................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding
six years; then of
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<PAGE>
amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of the
grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), or a trust, at the time of death or initial determination 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; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
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<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plan. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares then in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or
amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, Class C and Class Z shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
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<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE COMPANY AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE
OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY
BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY,
OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be
imposed at the time of exchange. Any applicable CDSC payable upon the
redemption of shares exchanged will be that imposed by the fund in which
shares are initially purchased and will be calculated from the first day of
the month after the initial purchase, excluding the time shares were held in a
money market fund. Class B and Class C shares may not be exchanged into money
market funds other than Prudential Special Money Market Fund, Inc. For
purposes of calculating the holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded. See "Conversion Feature--Class B Shares"
above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order.The exchange privilege is available only
in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares, will have
their Class B and Class C shares which are not subject to a CDSC and their
Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility
for this exchange privilege will be calculated on the business day prior to
the date of the exchange. Amounts representing Class B or Class C shares which
are not subject to a CDSC include the following: (1) amounts representing
Class B or Class C shares acquired pursuant to the automatic reinvestment of
dividends and distributions, (2) amounts representing the increase in the net
asset value above the total
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<PAGE>
amount of payments for the purchase of Class B or Class C shares and (3)
amounts representing Class B or Class C shares held beyond the applicable CDSC
period. Class B and Class C shareholders must notify the Transfer Agent either
directly or through Prudential Securities or Prusec that they are eligible for
this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they join the program. Upon leaving the program (whether voluntarily or
not), such Class Z shares (and, to the extent provided for in the program,
Class Z shares acquired through participation in the program) will be
exchanged for Class A shares at net asset value.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly
controlled accounts, if, in the Manager's sole judgment, such person, group or
accounts were following a market timing strategy or were otherwise engaging in
excessive trading ("Market Timers").
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec registered representative or
the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
40
<PAGE>
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data are available upon request from the
Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A. at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
41
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Fund at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND
FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET
FUNDS
. Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by either Fund or the Distributor. This Prospectus does
not constitute an offer by either Fund or by the Distributor to sell or a so-
licitation of any offer to buy any of the securities offered hereby in any ju-
risdiction to any person to whom it is unlawful to make such offer in such ju-
risdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 5
FINANCIAL HIGHLIGHTS....................................................... 6
HOW THE FUND INVESTS....................................................... 10
Investment Objective and Policies......................................... 10
Other Investments and Policies............................................ 15
Risk Factors and Special Considerations of
Investing in Foreign Securities.......................................... 17
Risk Factors Relating to Investing in Debt
Securities Rated Below Investment Grade (Junk Bonds)..................... 17
Hedging and Return Enhancement Strategies................................. 18
Investment Restrictions................................................... 21
HOW THE FUND IS MANAGED.................................................... 22
Manager................................................................... 22
Subadvisers............................................................... 22
Distributor............................................................... 23
Fee Waivers and Subsidy................................................... 25
Portfolio Transactions.................................................... 25
Custodian and Transfer and Dividend Disbursing Agent...................... 25
HOW THE FUND VALUES ITS SHARES............................................. 25
HOW THE FUND CALCULATES PERFORMANCE........................................ 26
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 26
GENERAL INFORMATION........................................................ 28
Description of Common Stock............................................... 28
Additional Information.................................................... 29
SHAREHOLDER GUIDE.......................................................... 29
How to Buy Shares of the Fund............................................. 29
Alternative Purchase Plan................................................. 30
How to Sell Your Shares................................................... 34
Conversion Feature--Class B Shares........................................ 38
How to Exchange Your Shares............................................... 39
Shareholder Services...................................................... 40
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF 174A-1
Class A:
Class B:
Cusip Nos.:
Class C:
Class Z:
Prudential Jennison Active
Balanced Fund
Prospectus ________ 1998
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Statement of Additional Information dated , 1998
Prudential Jennison Series Fund, Inc. (the Company) is an open-end,
diversified, management investment company consisting of three series:
Prudential Jennison Growth Fund (Growth Fund), Prudential Jennison Growth &
Income Fund (Growth & Income Fund) and Prudential Jennison Active Balanced
Fund (Active Balanced 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 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 investment objective of Active Balanced Fund is to seek to achieve total
returns approaching equity returns, while accepting less risk than an all-
equity portfolio, through an actively-managed portfolio of equity securities,
fixed income securities and money market instruments. The investment adviser
uses the following ranges as the normal operating parameters for the
securities to be purchased by the Fund: (i) 40-75% of the total assets of the
Fund will be invested in common stocks, preferred stocks and other equity-
related securities; (ii) 25-60% of the total assets of the Fund will be
invested in investment grade fixed income securities; and (iii) 0-35% of the
total assets of the Fund will be invested in money market instruments. Within
these parameters, at least 25% of the Fund's total assets will be invested in
fixed income senior securities.
Each Fund may also 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.
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 Growth and Growth & Income Funds' Prospectus,
dated January , 1998, and the Active Balanced Fund's Prospectus, dated
January , 1998, copies of which may be obtained from the Company upon
request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE TO PAGE CROSS-REFERENCE TO PAGE
IN GROWTH AND GROWTH & IN ACTIVE BALANCED
PAGE INCOME FUNDS' PROSPECTUS FUND PROSPECTUS
----- ------------------------ -----------------------
<S> <C> <C> <C>
General Information..... B-2 25
Investment Objectives
and Policies........... B-2 8
Investment Restrictions. B-18 18
Directors and Officers.. B-21 18
Manager and Subadvisers. B-25 19
Distributor............. B-27 20
Portfolio Transactions
and Brokerage.......... B-31 22
Purchase and Redemption
of Fund Shares......... B-32 26
Shareholder Investment
Account................ B-35 37
Net Asset Value......... B-39 22
Taxes, Dividends and
Distributions.......... B-40 23
Performance Information. B-43 23
Custodian, Transfer and
Dividend Disbursing
Agent and Independent
Accountants............ B-46 22
Financial Statements.... B-47 --
Report of Independent
Accountants............
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
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. On August 27, 1997, the Company added a third series,
Prudential Jennison Active Balanced Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Company is an open-end, diversified, management investment company
consisting of three 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. The
investment objective of the Active Balanced Fund 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. See "How the Funds Invest--
Investment Objectives and Policies" in the Growth and Growth & Income Funds'
Prospectus and "How the Fund Invests--Investment Objective and Policies" in
the Active Balanced Fund's Prospectus. There can be no assurance that the
Funds' investment objectives will be achieved.
The term "investment adviser" 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.
B-2
<PAGE>
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.
MORTGAGE-RELATED SECURITIES
The Active Balanced Fund and the Growth Fund may invest in mortgage-backed
securities, including those which represent undivided ownership interests in
pools of mortgages, issued by the U.S. Government or an issuing agency or
instrumentality which 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 a
Fund's shares. The Active Balanced Fund also may invest in mortgage-backed
securities issued by private entities. Mortgage-backed 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. A 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.
The Active Balanced Fund and the 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.
Private mortgage-backed securities in which the Active Balanced Fund may
invest represent pass-through pools consisting principally of conventional
residential mortgage loans created by non-governmental issuers, such as
commercial banks, savings and loan associations and private mortgage insurance
companies.
The Active Balanced Fund expects that private and governmental entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may be
shorter than previously was customary. As new types of mortgage-backed
securities are developed and offered to investors, the Fund, consistent with
its investment objective and policies, will consider making investments in
those new types of securities.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In
addition, a pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments include the
level of interest rates, general economic and social conditions, the location
of the mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that
prepayments will result in an average life ranging from two to ten years for
pools of fixed rate 30-year mortgages. Pools of mortgages with other
maturities or different characteristics will have varying average life
assumptions.
B-3
<PAGE>
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest
rates. To the extent that a Fund purchases mortgage-related securities at a
premium, unscheduled prepayments, which are made at par, will result in a loss
equal to any unamortized premium.
Government stripped mortgage-related interest only (IOs) and principal only
(POs) securities in which the Growth Fund and Active Balanced Fund may invest
are currently traded in an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that a Fund will be able
to effect a trade of IOs or POs at a time when it wishes to do so. A Fund will
acquire IOs and POs only if, in the opinion of the Fund's Subadviser, a
secondary market for the securities exists at the time of acquisition, or is
subsequently expected. Each Fund will treat IOs and POs that are not U.S.
Government securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, in order not to hold
more than 15% of its net assets in illiquid securities. With respect to IOs
and POs that are issued by the U.S. Government, the Subadviser, subject to the
supervision of the Board of Directors, may determine that such securities are
liquid, if it determines the securities can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share.
Investment in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing
the securities. If a decline in the level of prevailing interest rates results
in a rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs
and increasing the yield to maturity on POs. Sufficiently high prepayment
rates could result in the Fund not fully recovering its initial investment in
an IO.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Growth Fund and Active Balanced Fund also may invest in, among other
things, parallel pay Collateralized Mortgage Obligations (CMOs), and Planned
Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
always are parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
In reliance on Securities and Exchange Commission (SEC) rules and orders, a
Fund's investments in certain qualifying CMOs, including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits (REMICs ),
are not subject to the limitations of the Investment Company Act of 1940
(Investment Company Act) on acquiring interests in other investment companies.
In order to be able to rely on the SEC's interpretation, the CMOs and REMICs
must be unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-
backed securities, (ii) do not issue redeemable securities, (iii) operate
under general exemptive orders exempting them from all provisions of the
Investment Company Act, and (iv) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that a Fund
selects CMOs or REMICs that do not meet the above requirements, the Fund may
not invest more than 10% of its assets in all such entities and may not
acquire more than 3% of the voting securities of any single such entity.
B-4
<PAGE>
ASSET-BACKED SECURITIES
The Active Balanced Fund may invest in asset-backed securities. The value of
these securities may change because of changes in the market's perception of
the creditworthiness of the servicing agent for the pool, the originator of
the pool, or the financial institution providing credit enhancement for the
pool.
CUSTODIAL RECEIPTS
The Active Balanced Fund may acquire custodial receipts or certificates, such
as CATS, TIGRs and FICO Strips, underwritten by securities dealers or banks,
that evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies or
instrumentalities. The underwriters of these certificates or receipts purchase
a U.S. Government security and deposit the security in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government security. Custodial
receipts evidencing specific coupon or principal payments have the same
general attributes as zero coupon U.S. Government securities.
There are a number of risks associated with investments in custodial
receipts. Although typically under the terms of a custodial receipt, the Fund
is authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund may be required to assert through the
custodian bank such rights as may exist against the underlying issuer. Thus,
if the underlying issuer fails to pay principal and/or interest when due, the
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if the Fund had purchased a direct obligation of
the issuer. In addition, if the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
LIQUIDITY PUTS
The Active Balanced Fund may purchase instruments together with the right to
resell the instruments at an agreed-upon price or yield, within a specified
period prior to the maturity date of the instruments. This instrument is
commonly known as a "put bond" or a "tender option bond."
Consistent with its investment objective, the Active Balanced Fund may
purchase a put so that it will be fully invested in securities while
preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the put. The Fund will generally
exercise the puts or tender options on their expiration date when the exercise
price is higher than the current market price for the related fixed income
security. Puts or tender options may be exercised prior to the expiration date
in order to fund obligations to purchase other securities or to meet
redemption requests. These obligations may arise during periods in which
proceeds from sales of Fund shares and from recent sales of portfolio
securities are insufficient to meet such obligations or when the funds
available are otherwise allocated for investment. In addition, puts may be
exercised prior to the expiration date in the event the Subadviser for the
Fund revises its evaluation of the creditworthiness of the issuer of the
underlying security. In determining whether to exercise puts or tender options
prior to their expiration date and in selecting which puts or tender options
to exercise in such circumstances, the Fund's Subadviser considers, among
other things, the amount of cash available to the Fund, the expiration dates
of the available puts or tender options, any future commitments for securities
purchases, the yield, quality and maturity dates of the underlying securities,
alternative investment opportunities and the desirability of retaining the
underlying securities in the Fund.
These instruments are not deemed to be "put options" for purposes of the
Active Balanced Fund's investment restriction.
B-5
<PAGE>
LOWER-RATED AND UNRATED DEBT SECURITIES
The Active Balanced Fund and the Growth Fund may invest, to a limited extent,
in lower-rated and unrated debt securities. Non-investment grade fixed income
securities are rated lower than Baa (or the equivalent rating or, if not
rated, determined by the Subadviser to be of comparable quality to securities
so rated) and are commonly referred to as high risk or high yield securities
or "junk" bonds. High yield securities are generally riskier than higher
quality securities and are subject to more credit risk, including risk of
default, and the prices of such securities are more volatile than higher
quality securities. Such securities may also have less liquidity than higher
quality securities. The Active Balanced Fund is not authorized to invest in
excess of 5% of its net assets in non-investment grade fixed income
securities. The Growth Fund may not invest more than 10% of its net assets in
non-investment grade fixed income securities.
The markets in which lower-rated securities (or unrated securities that are
equivalent to lower-rated securities) are traded are generally more limited
than those in which higher-rated securities are traded. The existence of
limited markets may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its
net asset value. Moreover, the lack of a liquid trading market may restrict
the availability of debt securities for a Fund to purchase and may also have
the effect of limiting the ability of the Fund to sell debt securities at
their fair value either to meet redemption requests or to respond to changes
in the economy or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of fixed income
securities moves inversely with movements in interest rates, in the event of
rising interest rates, the value of the securities held by the Fund may
decline proportionately more than a fund consisting of higher-rated
securities. Investments in zero coupon bonds may be more speculative and
subject to greater fluctuations in value due to changes in interest rates than
bonds that pay interest currently. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Fund and
increasing the exposure of the Fund to the risks of lower-rated securities.
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
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purchaser, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the
term of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. A put option is a similar
contract which gives the purchaser, in return for a premium, the right to sell
the underlying security at a specified price during the term of the option.
The writer of the put, who receives the premium, has the obligation to buy the
underlying security upon exercise at the exercise price. 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 other 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.
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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 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
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had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of any
of the clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders. 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.
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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
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 or other liquid, 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.
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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 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.
FOREIGN CURRENCY STRATEGIES--SPECIAL CONSIDERATIONS
The Active Balanced Fund may use options on foreign currencies, futures on
foreign currencies, options on futures on foreign currencies and forward
currency contracts, to hedge against movements in the values of the foreign
currencies in which the Fund's securities are denominated. Such currency
hedges can protect against price movements in a security that the Fund owns or
intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, the Fund may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which the Fund's Subadviser believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
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The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, a Fund could be disadvantaged by dealing in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the futures contracts or
options until they reopen.
Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place with in the country issuing
the underlying currency. Thus, the Fund might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements
by U.S. residents and might by required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
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. The Active Balanced
Fund may purchase futures contracts on securities, currency, stock indices and
interest rate indices and options thereon.
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, 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.
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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 or other liquid 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 other 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 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.
B-13
<PAGE>
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 other 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 Growth nor Growth & Income 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 Growth and Growth & Income Funds' Prospectus and "How the Fund Invests-
Hedging and Return Enhancement Strategies--Options Transactions" in the Active
Balanced Fund's 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 or other liquid 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 or other liquid 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 other 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 of
the call held is equal to or less than the exercise price of
B-14
<PAGE>
the call written or greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or other 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 other 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
The Growth Fund and Growth & Income 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 Growth and Growth & Income
Funds' 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
B-15
<PAGE>
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.
REVERSE REPURCHASE AGREEMENTS
The Active Balanced Fund may enter into reverse repurchase agreements with
banks and securities dealers which meet the creditworthiness standards
established by the Company's Board of Directors. The investment adviser will
monitor the continued creditworthiness of these parties, subject to the
oversight of the Company's Board of Directors. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Active Balanced Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase.
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. The Active Balanced Fund also may borrow through forward rolls,
dollar rolls or through reverse repurchase agreements, and also to take
advantage of investment opportunities. 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. 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
B-16
<PAGE>
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
No 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 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.
B-17
<PAGE>
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 companies, shareholders of the Fund may be subject to
duplicate management and advisory fees. See "Investment Restrictions."
FORWARD ROLLS AND DOLLAR ROLLS
The Active Balanced Fund may enter into forward roll and dollar roll
transactions which involve the risk that the market value of the securities
sold by the Fund may decline below the repurchase price of those securities.
At the time the Fund enters into a forward roll transaction, it will place in
a segregated account with its Custodian cash or other liquid assets, having a
value equal to the repurchase price (including accrued interest). See
"Segregated Accounts" below.
SEGREGATED ACCOUNTS
When a Fund is required to segregate assets in connection with the purchase
of securities on a when-issued or delayed delivery basis, securities lending
and certain hedging transactions, it will maintain cash or other liquid assets
in a segregated account with the Fund's Custodian. "Liquid assets" mean cash,
U.S. Government securities, equity securities (including foreign securities),
debt obligations or other liquid, unencumbered assets, marked-to-market daily.
PORTFOLIO TURNOVER
As a result of the investment policies described above, each Fund may engage
in a substantial number of portfolio transactions, but no 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, Dividends and
Distributions."
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.
B-18
<PAGE>
Growth and Growth & Income 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.)
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
"Investment Objectives and Policies--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.
B-19
<PAGE>
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
Active Balanced 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 or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% of the value of its total assets
(calculated when the loan is made) to take advantage of investment
opportunities for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of 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 subject to this
restriction.
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, and forward
foreign currency exchange contracts.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, if may be deemed to be an underwriter
under certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other non-affiliated 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. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3 of the Fund's total assets.
11. 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
B-20
<PAGE>
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 AND ADDRESS ** POSITION WITH
(AGE) 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; previously, Vice
Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary
and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; Director of The High Yield Income
Fund, Inc.
Delayne Dedrick Gold 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,
Prudential Investments Fund Management LLC
(PIFM); Senior Vice President (since March
1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief
Administrative Officer (July 1990-September
1996), Director (January 1989-September 1996)
and Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-September
1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989); Director
of The High Yield Income Fund, Inc.
Douglas H. McCorkindale Director Vice Chairman (since March 1984), Gannett Co.
(57) Inc. (publishing and media); Director of
Gannett Co. Inc., Frontier Corporation and
Continental Airlines, Inc.
*Mendel A. Melzer, CFA Director Chief Investment Officer (since October 1996) of
(36) Prudential Mutual Funds & Annuities (PMF&A);
751 Broad St. formerly Chief Financial Officer (November
Newark, NJ 07102 1995-September 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.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS **
(AGE) POSITION WITH COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------------- --------------------- -----------------------------------------
<S> <C> <C>
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.
Robin B. Smith (57) Director Chairman (since August 1996) and Chief Executive
Officer (since January 1988), formerly
President (September 1981-August 1996) and
Chief Operating Officer (September 1981-
December 1988) of Publishers Clearing House;
Director of BellSouth Corporation, Texaco
Inc., Springs 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), President, Publisher & CEO of The
Detroit News (February 1986-August 1989) and
member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield
Income Fund, Inc.
Clay T. Whitehead (58) Director President (since May 1983) of National Exchange
Inc. (new business development firm).
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS ** POSITION WITH
(AGE) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------------- ------------- -----------------------------------------
<S> <C> <C>
Thomas A. Early Vice President Vice President and General Counsel (since March
1997) of
PMF & A; Executive Vice President, Secretary
and General Counsel (since December 1996) of
PIFM; formerly Vice President and General
Counsel (March 1994-March 1997) of Prudential
Retirement Services and Associate General
Counsel and Chief Financial Services Officer
(1988-1994) of Frank Russell Company.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of
PIFM; Senior Vice President and Senior Counsel
of Prudential Securities (since July 1992);
formerly Senior Vice President (January 1991-
September 1996) and Senior Counsel (June 1987-
September 1996) of Prudential Mutual Fund
Management, Inc.
Grace C. Torres (38) Treasurer and First Vice President (since December 1996) of
Principal Financial PIFM; First Vice President (since March 1994)
and Accounting of Prudential Securities; formerly First Vice
Officer President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc. and
Vice President (July 1989-March 1994) of
Bankers Trust Corporation.
Marguerite E.H. Assistant Secretary Vice President (since December 1996) of PIFM;
Morrison(41) Vice President and Associate General Counsel
of Prudential Securities (since March 1995);
formerly Vice President and Associate General
Counsel (June 1991-September 1996) of
Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (43) 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) and Senior Tax Manager of Price
Waterhouse (1981-January 1993).
</TABLE>
- --------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
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 PIFM or Jennison Associates Capital Corp.
B-23
<PAGE>
(Jennison or the Subadviser) annual compensation of $2,500, in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds on the
Boards of which the Director will be asked to serve.
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.
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, Mr. Beach is
scheduled to retire on December 31, 1999.
The following table sets forth aggregate compensation paid by the Company to
the Directors for the fiscal year ended September 30, 1997 and the aggregate
compensation paid to such Directors for service on the boards of other
investment companies managed by PIFM (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 shareholder 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(/2/)
- ----------------- ------------- --------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Beach, Edward D.--Direc-
tor $ None N/A $166,000(21/39)*
Dorsey, Eugene C.**--
Former Director $ None N/A $98,583(12/36 )*
Gold, Delayne D.--Direc-
tor $ None N/A $175,308(21/42)*
Gunia, Robert F.(/1/)--
Director $ 0 None N/A $ 0
Lennox, Donald D.--For-
mer Director $ None N/A $ 90,000(10/22)*
McCorkindale, Douglas
H.--Director $ None N/A $ 71,208(10/13)*
Melzer, Mendel A.(/1/)--
Director $ 0 None N/A $ 0
Mooney, Thomas T.--Di-
rector $ None N/A $135,375(18/36)*
Munn, Stephen P.--Direc-
tor $ None N/A $ ( )*
Redeker, Richard
A.(/1/)--President and
Director $ 0 None N/A $ 0
Smith, Robin B.**--Di-
rector $ None N/A $ ( )*
Weil, III, Louis A.--Di-
rector $ None N/A $ 91,250(13/18)*
Whitehead, Clay T.--Di-
rector $ None N/A $ ( )*
</TABLE>
- --------
@ Effective January 1997, the annual compensation paid to each Director was
reduced from $7,500 to $2,500, in addition to certain out-of-pocket expenses.
* 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).
** Aggregate compensation from the Fund Complex for the year ended December 31,
1996, including accrued interest, amounted to approximately $ and
$ for each of Mr. Dorsey and Ms. Smith, respectively.
(2) Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1996, including amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total deferred compensation amounted to $71,034, $139,869 and
$109,294 for Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
Currently, Ms. Smith has agreed to defer her fees at the Fund rate.
B-24
<PAGE>
As of October 31, 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 October 31, 1997, Jennison Associates Capital Corp. Savings Plan, TTEE
J. Kanary, M. Baiso & B Goldberg, C/O Corporate Services, 466 Lexington Ave.,
18th Fl., New York, NY 10017-3140 and Bradley L. Goldberg, 502 Orienta Ave.,
Mamaroneck, NY 10543-4317 were the beneficial owners of 157,241 and 139,258
Class A shares of the Growth & Income Fund (5.7% and 5.1%, respectively);
Prudential Trust Company, FBO PRUD-DC Trust Accounts, Attn John Surdy, 30
Scranton Office Park, Moosic, PA 18507-1791, Mr. John A. Hart, TTEE for John
A. & Eleanor E. Hart Family Trust UA DTD 08/25/95, 500 Laramie Trl.,
Cincinnati, OH 45215-2504, and Mr. Neil L. Cushman & Mrs. Katy L. Cushman, JT
TEN, 5248 Calle Barquero, Santa Barbara, CA 93111-1743 were the beneficial
owner of 10,876, 4,825 and 5,613 Class Z shares of Prudential Jennison Growth
& Income Fund (18.8%, 8.3% and 9.7%, respectively); and Prudential Trust
Company, FBO PRU-DC Trust Accounts, ATTN: John Surdy, 30 Scranton Office Park,
Moosic, PA 18507-1791 and Pru Defined Contribution Svcs, FBO Pru-Non-Trust
Accounts, ATTN: John Surdy, 30 Scranton Office Park, Moosic, PA 18507-1789,
were the beneficial owners of 13,502,139 and 25,402,165 Class Z shares of the
Growth Fund (32.1% and 60.4%, respectively).
As of October 31, 1997, Prudential Securities was the record holder for other
beneficial owners of 6,357,901 Class A shares (approximately 65.8% of such
shares outstanding), 19,445,918 Class B shares (approximately 68.4% of such
shares outstanding), 1,403,825 Class C shares (approximately 81.3% of such
shares outstanding) and 258,076 Class Z shares (approximately 0.61% of such
shares outstanding) of Growth Fund; and 2,168,278 Class A shares
(approximately 79.6% of such shares outstanding), 5,803,832 Class B shares
(approximately 83.8% of such shares outstanding), 528,254 Class C shares
(approximately 94.4% of such shares outstanding) and 46,780 Class Z shares
(approximately 81.0% 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 AND SUBADVISERS
The manager of the Company is Prudential Investments Fund Management LLC
(PIFM or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077. PIFM serves as manager to all of the other investment
companies that, together with the Funds, comprise the Prudential Mutual Funds.
See "How the Fund is Managed--Manager" in the Active Balanced Fund's
Prospectus and "How the Funds are Managed--Manager" in the Growth and Growth &
Income Funds' Prospectus. As of December 31, 1997, PIFM managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $ billion. According to the Investment Company
Institute, as of December 31, 1997, the Prudential Mutual Funds were the
largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and 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 each Management Agreement with the Company (the Management
Agreements), 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 Agreements and
PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreements, a fee
at an annual rate of .60 of 1% of each of Growth Fund and Growth & Income
Fund's average daily net assets and a fee at an annual rate of .65 of 1% of
the Active
B-25
<PAGE>
Balanced Fund's average daily net assets. Each fee is computed daily and
payable monthly. The Management Agreements also provide that, in the event the
expenses of a Fund (including the fees of PIFM, but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course
of the Fund's business) for any fiscal year exceed the lowest applicable
annual expense limitation established and enforced pursuant to the statutes or
regulations of any jurisdiction in which the Fund's shares are qualified for
offer and sale, the compensation due to PIFM will be reduced by the amount of
such excess. Reductions in excess of the total compensation payable to PIFM
will be paid by PIFM to the Company. No such reductions were required during
the fiscal year ended September 30, 1997. No jurisdiction currently limits a
Fund's expenses.
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 advisers;
(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 separate Subadvisory
Agreements between PIFM and Jennison (the Subadvisory Agreements) and, with
respect to Active Balanced Fund, the fees payable to The Prudential Investment
Corporation, doing business as Prudential Investments (PI), pursuant to a
Subadvisory Agreement between PIFM and PI (the Cash Management Subadvisory
Agreement).
Under the terms of each 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, including the
preparation and printing of each Fund's registration statements and
prospectuses for such purposes and paying the fees and expenses of notice
filings made in accordance with state securities laws, (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.
Each 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. Each Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. Each
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement for the Growth Fund and Growth & Income
Fund 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 May 21, 1997. The
Management Agreement for the Active Balanced Fund was 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 August 26, 1997.
B-26
<PAGE>
PIFM has entered into two Subadvisory Agreements with Jennison, a wholly-
owned subsidiary of Prudential. The Subadvisory Agreements provide that
Jennison will furnish investment advisory services in connection with the
management of the Growth and Growth & Income Fund and the Active Balanced Fund,
respectively. In connection therewith, Jennison is obligated to keep certain
books and records of each Fund. Under each 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 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 each Management
Agreement. Under each 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. The
Growth & Income Fund was not offered during the fiscal year ended September 30,
1996. For the fiscal year ended September 30, 1997, PIFM received from Growth
Fund management fees of $5,276,337, of which $2,638,169 was paid to Jennison,
and PIFM received from Growth & Income Fund management fees of $513,032, of
which $256,516 was paid to Jennison. The Active Balanced Fund was not offered
during the fiscal year ended September 30, 1997.
Each Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the applicable Management Agreement. Each Subadvisory Agreement
may be terminated by the Company, PIFM or Jennison upon not more than 60 days',
nor less than 30 days', written notice. Each Subadvisory Agreement provides
that it will continue in effect for a period of more than two years from its
execution only so long as such continuance is specifically approved at least
annually in accordance with the requirements of the Investment Company Act. The
Subadvisory Agreement for the Growth Fund and Growth & Income Fund 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 May 21, 1997. The Subadvisory
Agreement with Jennison for the Active Balanced Fund was 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 August 26, 1997.
The Cash Management Subadvisory Agreement provides that PI manage short-term
assets and cash for the Active Balanced Fund and invest available cash balances
for the Fund through a joint repurchase agreement account. PI is reimbursed by
PIFM for reasonable costs and expenses incurred by it in furnishing such
services. This Agreement was 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 August
26, 1997.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), 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 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 Growth and Growth & Income
Funds' Prospectus and "How the Fund is Managed--Distributor" in the Active
Balanced Fund's Prospectus. Prudential Securities also incurs the expenses of
distributing the Class Z shares under the Distribution Agreement with the
Company, none of which are reimbursed by or paid for by any Fund.
B-27
<PAGE>
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. The Plans
were last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on August 26, 1997. No shares of the Active Balanced Fund were
outstanding during the fiscal year ended September 30, 1997.
Class A Plan. For the fiscal year ended September 30, 1997, the Growth Fund
paid distribution fees of $264,954 to Prudential Securities under the Class A
Plan. For the fiscal period from November 7, 1996 (commencement of investment
operations of the Growth & Income Fund) through September 30, 1997, the Growth
& Income Fund paid distribution fees of $60,491 to Prudential Securities under
the Class A Plan. These amounts were primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares
of the applicable Fund. In addition, for the same periods, Prudential
Securities received approximately $608,000 and $182,700 in initial sales
charges with respect to the sale of Class A shares of Growth Fund and Growth &
Income Fund, respectively.
Class B Plan. For the fiscal year ended September 30, 1997, Prudential
Securities received $2,994,762 from the Growth Fund under the Class B Plan and
spent approximately $ in distributing Class B shares of the Growth Fund. It
is estimated that of the latter amount, approximately $ ( %) was spent on
printing and mailing of prospectuses to other than current shareholders; $
( %) 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
$ ( %) on the aggregate of (i) payments of commissions and account
servicing fees to financial advisers ($ or %) and (ii) an allocation on
account of overhead and other branch office distribution-related expenses ($
or %). 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.
For the fiscal period from November 7, 1996 (commencement of investment
operations of the Growth & Income Fund) through September 30, 1997, Prudential
Securities received $560,606 from the Growth & Income Fund under the Class B
Plan and spent approximately $ in distributing Class B shares of the Growth
& Income Fund. It is estimated that of the latter amount, approximately $
( %) was spent on printing and mailing of prospectuses to other than current
shareholders; $ ( %) on compensation to 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 $ ( %) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers ($ or %) and
(ii) an allocation on account of overhead and other branch office distribution-
related expenses ($ or %). 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 &
Income Fund shares, including lease costs, the salaries and employee benefits
of operations and sales support personnel, utility costs,
B-28
<PAGE>
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 & Income Fund shares, and (d) other incidental
expenses relating to branch promotion of Growth & Income 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 each Prospectus. For the same periods, Prudential Securities
received approximately $727,100 and $119,300 in contingent deferred sales
charges attributable to Class B shares of Growth Fund and Growth & Income
Fund, respectively.
Class C Plan. For the fiscal year ended September 30, 1997, Prudential
Securities received $182,481 from Growth Fund under the Class C Plan and spent
approximately $ in distributing Class C shares of Growth Fund. It is
estimated that of the latter amount approximately % ($ ) was spent on
printing and mailing of prospectuses to other than current shareholders; %
($ ) 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; % ($ ) on the aggregate of (i) payments of commission and
account servicing fees to financial advisors ( % or $ ) and (ii) an
allocation of overhead and other branch office distribution-related expenses
( % or $ ).
For the fiscal period from November 7, 1996 (commencement of investment
operations of the Growth & Income Fund) through September 30, 1997, Prudential
Securities received $50,452 from Growth & Income Fund under the Class C Plan
and spent approximately $ in distributing Class C shares of Growth & Income
Fund. It is estimated that of the latter amount approximately % ($ ) was
spent on printing and mailing of prospectuses to other than current
shareholders; % ($ ) 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 & Income Fund; % ($ ) on the
aggregate of (i) payments of commission and account servicing fees to
financial advisors ( % or $ ) and (ii) an allocation of overhead and other
branch office distribution-related expenses ( % or $ ).
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 each Prospectus. For the same periods, Prudential Securities
received approximately $5,600 and $1,100 in contingent deferred sales charges
attributable to Class C shares of Growth Fund and Growth & Income Fund,
respectively.
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-29
<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 federal securities laws.
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 will 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
B-30
<PAGE>
charges equal to the prime rate plus one percent per annum may be added to the
6.25% limitation. Sales from the reinvestment of dividends and distributions
are not required to be included in the calculation of the 6.25% limitation. The
annual asset-based sales charge with respect to Class B and Class C shares of
the Fund may not exceed .75 of 1%. The 6.25% limitation applies to 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
B-31
<PAGE>
than Prudential Securities, for particular transactions than might be charged
if a different broker had been selected, on occasions when, in the Manager's
opinion, this policy furthers the objective of obtaining best price and
execution. In addition, the Manager is authorized to pay higher commissions on
brokerage transactions for 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 and paid
commissions of $1,135,470 for the fiscal year ended September 30, 1997, of
which $50,605 was paid to Prudential Securities or any of its affiliates. The
Growth & Income Fund paid commissions of $291,322 for the fiscal period ended
September 30, 1997, of which $13,935 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
Growth and Growth & Income Funds' Prospectus and "Shareholder Guide--How to Buy
Shares of the Fund" in the Active Balanced Fund's 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 charges 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-32
<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 value of each Fund at September 30, 1997, the maximum offering price
of the Funds' shares is as follows:
<TABLE>
<CAPTION>
GROWTH ACTIVE
& INCOME BALANCED
GROWTH FUND FUND FUND**
----------- -------- --------
<S> <C> <C> <C>
CLASS A
Net asset value and redemption price per Class A
share........................................... $15.39 $12.89 $14.41
Maximum sales charge (5% of offering price)...... .81 .68 .76
------ ------ ------
Offering price to public......................... $16.20 13.57 15.17
====== ====== ======
CLASS B
Net asset value, redemption price and offering
price per Class B share*........................ $15.18 12.86 14.34
====== ====== ======
CLASS C
Net asset value, redemption price and offering
price per Class C share*........................ $15.18 12.86 14.34
====== ====== ======
CLASS Z
Net asset value, offering price and redemption
price per Class Z share......................... $15.45 12.93 14.45
====== ====== ======
</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 each Prospectus.
**Active Balanced Fund shares did not exist at September 30, 1997.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of 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 each Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more 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).
B-33
<PAGE>
The Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in 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 Growth and
Growth & Income Funds' Prospectus and "How the Fund Values its Shares" in the
Active Balanced Fund's 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 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.
B-34
<PAGE>
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 each 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.
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
B-35
<PAGE>
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.
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
B-36
<PAGE>
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/)
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.
B-37
<PAGE>
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 each 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 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
B-38
<PAGE>
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 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.
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 trading on the applicable commodities exchange.
Should an extraordinary event,
B-39
<PAGE>
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 reliable market quotations are not
readily available, or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgment of the Manager or Subadviser (or Valuation
Committee or Board of Directors), does not represent fair value, are valued by
the Valuation Committee or Board of Directors in consultation with the Manager
and Subadviser. 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. The New York Stock Exchange is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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, DIVIDENDS AND DISTRIBUTIONS
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, 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 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 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 (c) 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.
B-40
<PAGE>
Gains or losses on sales of securities by a Fund will generally be treated as
long-term capital gains or losses if the securities have been held by it for
more than 18 months 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,
constructive sale, conversion transaction and straddle provisions of the
Internal Revenue Code which may, among other things, require the Fund to defer
recognition of losses. In addition, debt securities acquired by a Fund may be
subject to original issue discount and market discount rules which,
respectively, may cause the Fund to accrue income in advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
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, short sale and constructive 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 "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
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
B-41
<PAGE>
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.
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.
B-42
<PAGE>
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 Growth and Growth & Income Funds' Prospectus and
"How the Fund Calculates Performance" in the Active Balanced Fund's Prospectus.
Average annual total return is computed according to the following formula:
P ( 1 + T )/n/ = ERV
Where:P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total returns for the period from November 2, 1995
(commencement of investment operations) to September 30, 1997 and for the one
year period ended September 30, 1997 for the Class A, Class B and Class C
shares of Growth Fund were % and %, % and % and %, respectively. The
average annual total returns for Class Z shares of Growth Fund from April 15,
1996 (commencement of investment operations) to September 30, 1997 and for the
one year period ended September 30, 1997 were % and %, respectively.
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, 1997, your average annual total returns
(after fees and expenses) for the one, three and since inception (November 5,
1992) periods ended September 30, 1997 would have been %, % and %,
respectively. In addition, the aggregate total returns for such periods would
have been %, % and %, respectively.
B-43
<PAGE>
On or about January 23, 1998, the assets and liabilities of Prudential
Active Balanced Fund were transferred to the Active Balanced Fund, in exchange
solely for shares of Active Balanced Fund (the Conversion). The investment
objectives and policies of Prudential Active Balanced Fund and Active Balanced
Fund are identical and each fund has the same investment adviser. Accordingly,
if you purchased Class A shares of Prudential Active Balanced Fund at their
inception on October 31, 1996, your average annual total return (as well as
your aggregate total return) for the period ended September 30, 1997 would
have been %. If you had purchased Class B shares of Prudential Active
Balanced Fund at their inception on October 31, 1996, your average annual
total return (as well as your aggregate total return) for the period ended
September 30, 1997 would have been %. If you had purchased Class C shares of
Prudential Active Balanced Fund at their inception on October 31, 1996, your
average annual total return (as well as your aggregate total return) for the
period ended September 30, 1997 would have been %. If you had purchased
Class Z shares of Prudential Active Balanced Fund at their inception on
January 4, 1993, your average annual total returns for the one year and since
inception periods ended September 30, 1997 would have been % and %,
respectively. Your aggregate total returns for such periods would have been
% and %, 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 Growth
and Growth & Income Funds' Prospectus and "How the Fund Calculates
Performance" in the Active Balanced Fund's 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) to September 30,
1997 and for the one year period ended September 30, 1997 for the Class A,
Class B and Class C shares of Growth Fund were 53.90% and 40.29%, 51.80% and
39.39% and 51.80% and 39.39%, respectively. The aggregate total returns for
Class Z shares of Growth Fund from April 15, 1996 (commencement of investment
operations) to September 30, 1997 and for the one year period ended September
30, 1997 were 49.71% and 40.71%, respectively. Aggregate total returns for the
Class A, Class B, Class C and Class Z shares of Growth & Income Fund for the
period from November 7, 1996 (commencement of investment operations) to
September 30, 1997 were 29.72%, 28.83%, 28.83% and 30.30%, respectively.
B-44
<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/
PERFORMANCE COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS OVER THE LONG TERM
(1/1926 - 3/1997)
COMMON STOCKS - 10.7%
LONG-TERM GOVT. BONDS - 5.0%
INFLATION - 3.1%
- --------
/1/Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1997
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used
indicator of broad stock price movements. This chart is for illustrative
purposes only and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
B-45
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the 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 year ended September 30, 1997,
Growth Fund incurred fees of approximately $1,236,000 for the services of
PMFS. For the fiscal period ended September 30, 1997, Growth & Income Fund
incurred fees of approximately $88,800 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.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Company's independent accountants, and in that capacity audits
the annual financial statements of each Fund. For the fiscal year ended
September 30, 1996, Deloitte & Touche LLP, Two World Financial Center, New
York, New York 10281, served as the Company's independent accountants and in
that capacity audited the annual financial statements of Growth Fund.
B-46
<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 Kimberly-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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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.
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-1
<PAGE>
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.
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-2
<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 6/30/96
Stocks (S&P 500) - $1,227,490
U.S. (Long-Term) Treasury Bonds - $31,622
U.S. (30 day) Treasury Bills - $13,192
U.S. Inflation - $8,741
Source: Ibbotson Associates' EnCORR Software, Chicago, Illinois. All rights
reserved. This example is for illustrative purposes only and is not intended
to represent the past, present, or future performance of the Fund. Small-sized
stock performance for the period 1926-1980 is based on a historical series
composed of stocks making up the 5th quintile of the New York Stock Exchange;
thereafter, the index reflects the total return achieved by Dimensional Fund
Advisors (DFA) Small Company Fund. Source of mid-sized stock performance:
University of Chicago's Center for Research in Security Prices (CRSP). Mid-
sized stocks are comprised of an index of medium-sized companies listed on the
New York Stock Exchange (NYSE). All eligible companies listed on the NYSE are
ranked by market capitalization and then split into ten equally populated
groups, or deciles. The 3-5 decile represents mid-sized companies in this
example. Large-sized stock total return is based on the Standard & Poor's 500
Index, a market-weighted index made up of 500 of the largest stocks in the
U.S. based upon their stock market value. Past performance is not indicative
of future results. Investors cannot buy or invest directly in market indices.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each
year a new bond with a then-current coupon replaces the old bond. Treasury
bill returns are for a one-month bill. Treasuries are guaranteed by the
government as to the timely payment of principal and interest; equities are
not. Inflation is measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is
to outpace the erosive impact of inflation on investment returns.
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1996. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the Prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S.
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S.
Corporate
Bonds/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S.
High Yield
Corporate
Bonds/3/ 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
- ----------------------------------------------------------------------------------------------------------------------------------
World
Government
Bonds/4/ 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
==================================================================================================================================
Difference between highest
and lowest return percent 33.2 10.25 18.8 24.9 30.9 11.0 12.0 9.9 5.5 8.7
</TABLE>
- -------
/1/Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart illustrates the 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: Stocks, Bonds, Bills, and
Source: Morgan Stanley Capital Inflation 1995 Yearbook, Ibbotson
International (MSCI) Used with Associates, Chicago (annually
permission. Morgan Stanley Country updates work by Roger G. Ibbotson
indices are unmanaged indices and Rex A. Sinquefield). Used with
which include those stocks making permission. All rights reserved.
up the largest two-thirds of each This chart is used for
country's total stock market illustrative purposes only and is
capitalization. Returns reflect not intended to represent the
the reinvestment of all past, present or future
distributions. This chart is for performance of any Prudential
illustrative purposes only and is Mutual Fund. Common stock total
not indicative of the past, return is based on the Standard &
present or future performance of Poor's 500 Stock Index, a market-
any specific investment. Investors value-weighted index made up of
cannot invest directly in stock 500 of the largest stocks in the
indices. 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>
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. The Prudential provides auto insurance for more
than 1.7 million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 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, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
- --------
/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 subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennison Series Fund,
Inc. and BlackRock Financial Management, Inc. as subadviser to The BlackRock
Government Income Trust. There are multiple subadvisers for The Target
Portfolio Trust.
/2/As of December 31, 1994.
III-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteenth largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
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>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments as of September 30, 1996 for Prudential
Jennison Growth Fund (audited) and as of March 31, 1997 for
Prudential Jennison Growth Fund and Prudential Jennison Growth &
Income Fund (unaudited).
Statement of Assets and Liabilities as of September 30, 1996 for
Prudential Jennison Growth Fund (audited) and as of March 31, 1997
for Prudential Jennison Growth Fund and Prudential Jennison Growth &
Income Fund (unaudited).
Statement of Operations for the period ended September 30, 1996 for
Prudential Jennison Growth Fund (audited) and for the period ended
March 31, 1997 for Prudential Jennison Growth Fund and Prudential
Jennison Growth & Income Fund (unaudited).
Statement of Changes in Net Assets for the period ended September 30,
1996 for Prudential Jennison Growth Fund (audited) and for the period
ended March 31, 1997 for Prudential Jennison Growth Fund and
Prudential Jennison Growth & Income Fund (unaudited).
Notes to Financial Statements.
Financial Highlights.
Independent Auditors' Report.
(b) Exhibits:
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 (File No. 33-61997) filed via
EDGAR on February 14, 1996.
(b) Articles Supplementary, incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 4 to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on December 6, 1996.
(c) Amendment of Articles of Incorporation, incorporated by reference
to Exhibit 1(c) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
December 6, 1996.
(d) Articles Supplementary, incorporated by reference to Exhibit 1(d)
to the Registration Statement on Form N-14 (File No.333-38087) filed
via EDGAR on October 17, 1997.
2. By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on August
22, 1995.
3. Not Applicable.
4. Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on August 22, 1995.
C-1
<PAGE>
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-
1A (File No. 33-61997) filed via EDGAR on February 14, 1996.
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and Jennison Associates Capital Corp., incorporated by reference
to Exhibit 5(b) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on February
14, 1996.
(c) Form of Management Agreement between the Registrant and Prudential
Investments Fund Management LLC with respect to Prudential Jennison
Active Balanced Fund. *
(d) Form of Subadvisory Agreement between the Registrant and Jennison
Associates Capital Corp. with respect to Prudential Jennison Active
Balanced Fund.*
(e) Form of Subadvisory Agreement between the Registrant and The
Prudential Investment Corporation with respect to Prudential Jennison
Active Balanced Fund.*
6. (a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated, incorporated by reference to Exhibit 6(a) to
the Registration Statement on Form N-14 (File No. 333-38087) filed via
EDGAR on October 17, 1997.
(b) Form of Selected Dealer Agreement, incorporated by reference to
Exhibit 6(b) to the Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on September
19, 1995.
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 9 to the
Registration Statement on Form N-14 (File No. 333-6755) filed via EDGAR
on June 25, 1996.
9. 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 (File No. 333-
6755) filed via EDGAR on June 25, 1996.
10. Opinion of Shereff, Friedman, Hoffman & Goodman, LLP., incorporated by
reference to Exhibit 10 to the Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR
on September 19, 1995.
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Purchase Agreement, incorporated by reference to Exhibit 13 to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on February 14, 1996.
14. Not Applicable.
15. (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 (File No. 33-61997) filed via EDGAR
on February 14, 1996.
C-2
<PAGE>
(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 (File No. 33-61997) filed via EDGAR
on February 14, 1996.
(c) Distribution and Service Plan for Class C Shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR
on February 14, 1996.
16. (a) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth Fund, incorporated by reference to Exhibit 16 to Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on April 15, 1996.
(b) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth & Income Fund, incorporated by reference to Exhibit
16(b) to Post-Effective Amendment No. 5 to the Registration Statement
on Form N-1A (File No. 33-61997) filed via EDGAR on April 30, 1997.
17. Financial Data Schedules filed as Exhibit 27 to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A (File No.
33-61997) filed via EDGAR on April 30, 1997.
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File No. 33-61997) filed via EDGAR on April 15, 1996.
- --------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 31, 1997, there were 18,146, 53,764, 2,729, and 4,749 record
holders of Class A, Class B, Class C and Class Z common stock, $.001 par value
per share, of Prudential Jennison Growth Fund, respectively. As of October 31,
1997, there were 7,238, 8,901, 626 and 93 record holders of Class A, Class B,
Class C and Class Z common stock, $.001 par value per share, of Prudential
Jennison Growth & Income Fund, respectively. As of such date, there were no
shares outstanding of Prudential Jennison Active Balanced Fund.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended, (the 1940 Act) and pursuant to Article VI of the Company'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 6 to the Registration Statement), each Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (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.
C-3
<PAGE>
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 5(a) and (c) to the
Registration Statement) and Section 4 of each Subadvisory Agreement (Exhibits
5(b), (d) and (e) to the Registration Statement) limit the liability of
Prudential Investments Fund Management LLC (PIFM) and Jennison Associates
Capital Corp. (Jennison), respectively, to liabilities arising from willful
misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and (i) of
such Act remain in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either
the Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position on Section 17(h) advances will be limited in the
following respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that 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 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC
See "How the Funds are Managed--Manager" and "How the Fund is Managed--
Manager" in the Prospectuses constituting Part A of this Registration
Statement and "Manager and Subadvisers" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<C> <C> <S>
Brian Storms Officer-In-Charge, President, Prudential Mutual Funds &
President, Chief Annuities (PMF&A); Officer-In-Charge,
Executive Officer President, Chief Executive Officer and
and Chief Operating Chief Operating Officer, PIFM
Officer
Thomas A. Early Executive Vice Vice President and General Counsel,
President, PMF&A; Executive Vice President,
Secretary and Secretary and General Counsel, PIFM
General Counsel
Robert F. Gunia Executive Vice Comptroller, Prudential Investments;
President and Executive Vice President and
Treasurer Treasurer, PIFM; Senior Vice President
of Prudential Securities Incorporated
(Prudential Securities)
Neil A. McGuinness Executive Vice Executive Vice President and Director
President of Marketing, PMF&A; Executive Vice
President, PIFM
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A;
President Executive Vice President, PIFM
</TABLE>
(b) Jennison Associates Capital Corp.
See "How the Funds are Managed--Subadviser" and "How the Fund is Managed--
Subadvisers" in the Prospectuses constituting Part A of this Registration
Statement and "Manager and Subadvisers" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-5
<PAGE>
The business and other connections of Jennison directors and executive
officers are as set forth below. Except as otherwise indicated, the address of
each person is 466 Lexington Avenue, New York, NY 10017.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH JENNISON PRINCIPAL OCCUPATIONS
---------------- ---------------------- ---------------------
<C> <C> <S>
Blair A. Boyer Senior Vice Senior Vice President and
President and Director, Jennison
Director
Cecilia M. Brancato Senior Vice Senior Vice President and
President and Director, Jennison
Director
Robert B. Corman Senior Vice Senior Vice President and
President and Director, Jennison
Director
Michael A. Del Balso Senior Vice Senior Vice President,
President, Director of Internal Research,
Director of and Director, Jennison
Internal
Research and
Director
Thomas F. Doyle Executive Vice Executive Vice President and
One Financial Center President and Director, Jennison
Boston, MA 02111 Director
John H. Feingold Senior Vice Senior Vice President and
One Financial Center President and Director, Jennison
Boston, MA 02111 Director
Joseph P. Ferrugio Senior Vice Senior Vice President and
President and Director, Jennison; Senior
Director Vice President, JACC Services
Corp.
Bradley L. Goldberg Executive Vice Executive Vice President and
President and Director, Jennison; Director,
Director JACC Services Corp.
Director President--Investment
Management of a division of
Prudential Investments, a
business group of The
Jonathan M. Greene Prudential Insurance Company
The Prudential Insurance of America; Senior Vice
Company of America President and Director, The
751 Broad Street Prudential Investment
Newark, NJ 07102 Corporation
John H. Hobbs Chairman and Chairman and Chief Executive
Chief Executive Officer and Director,
Officer and Jennison; President, JACC
Director Services Corp.; President--
Institutional Asset Management
of Prudential Investments
James N. Kannry Senior Vice Senior Vice President,
President, Treasurer and Director,
Treasurer and Jennison;
Director Senior Vice President,
Treasurer and Director, JACC
Services
Corp.
Karen E. Kohler Senior Vice Senior Vice President, Chief
President, Chief Compliance Officer, Secretary
Compliance and Director, Jennison; Senior
Officer, Vice President, Assistant
Secretary and Treasurer and Secretary, JACC
Director Services Corp.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH JENNISON PRINCIPAL OCCUPATIONS
---------------- ---------------------- ---------------------
<C> <C> <S>
Jonathan R. Longley Executive Vice Executive Vice President and
One Financial Center President and Director, Jennison
Boston, MA 02111 Director
Philip H.B. Moss Executive Vice Executive Vice President and
President and Director, Jennison
Director
David T. Poiesz Senior Vice Senior Vice President and
President and Director, Jennison
Director
Michael H. Porreca Senior Vice Senior Vice President and
One Financial Center President and Director, Jennison
Boston, MA 02111 Director
Peter H. Reinemann Senior Vice Senior Vice President and
President and Director, Jennison
Director
Spiros Segalas President, Chief President, Chief Investment
Investment Officer and Director, Jennison;
Officer and Director, JACC Services Corp.
Director
Lulu C. Wang Executive Vice Executive Vice President and
President and Director, Jennison
Director
Catherine D. Wood Senior Vice Senior Vice President and
President and Director, Jennison
Director
</TABLE>
(c) The Prudential Investment Corporation (PIC)
See "Management of the Fund--Subadvisers" in the Prospectus of Prudential
Jennison Active Balanced Fund constituting Part A of this Registration
Statement and "Manager and Subadvisers" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza,
Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <C> <S>
E. Michael Caulfield Chief Executive Officer,
Chairman of the Board, Prudential Investments of
President and Chief The Prudential Insurance
Executive Officer and Company of America
Director (Prudential)
Jonathan M. Greene Senior Vice President and President--Investment
Director Management, Prudential
Investments of Prudential;
Senior Vice President and
Director, PIC
John R. Strangfeld, Jr. Vice President and Director President of Private Asset
Management Group of
Prudential; Senior Vice
President, Prudential;
Vice President and
Director, PIC
</TABLE>
C-7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, The Global Total Return Fund, Inc., Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Global Utility
Fund, Inc., Nicholas Applegate Fund, Inc. (Nicholas-Applegate Growth Equity
Fund), Prudential Balanced Fund, Prudential California Municipal Fund,
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential Institutional Liquidity Portfolio, Inc., Prudential Intermediate
Global Income Fund, Inc., Prudential International Bond Fund, Inc., Prudential
Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential
Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Small-Cap Quantum Fund, Inc., Prudential
Small Company Value Fund, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The
Target Portfolio Trust. Prudential Securities is also a depositor for the
following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME /1/ UNDERWRITER REGISTRANT
- -------- ------------- -------------
<S> <C> <C>
Alan D. Hogan........... Executive Vice President and Director None
George A. Murray........ Executive Vice President and Director None
Leland B. Paton......... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff....... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II..... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons........ Chief Executive Officer, President and Director None
Lee B. Spencer, Jr...... Executive Vice President, Secretary, General Counsel and Director None
Brian Storms............ Director None
751 Broad Street
Newark, NJ 07102
</TABLE>
- --------
/1/The address of each person named is One Seaport Plaza, New York, NY
10292 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, Jennison Associates Capital Corp., 466 Lexington Avenue,
New York, N.Y. 10017, the Registrant,
C-8
<PAGE>
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will
be kept at 466 Lexington Avenue, documents required by Rules 31a-1(b)(4) and
(11) and 31a-1(d) at Gateway Center Three and the remaining accounts, books
and other documents required by such other pertinent provisions of Section
31(a) and the Rules promulgated thereunder will be kept by State Street Bank
and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Funds are Managed--
Manager" and "How the Funds are Managed--Distributor" and "How the Fund is
Managed--Manager" and "How the Fund is Managed--Distributor" in the
Prospectuses and the captions "Manager and Subadvisers" and "Distributor" in
the Statement of Additional Information, constituting Parts A and B,
respectively, of this Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
Registrant makes the following undertakings:
To furnish each person to whom a Prospectus is delivered with a copy of
Registrant's latest annual report to shareholders upon request and without
charge.
To file a Post-Effective Amendment using financial statements which need not
be certified, within four to six months from the effective date of Post-
Effective Amendment No.6 to Registrant's Registration Statement.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 7th 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 Post-
Effective Amendment to the Registration Statement has been signed below on the
following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
Treasurer and
/s/ Grace C. Torres Principal November 7,
- ----------------------------------- Financial and 1997
Accounting
GRACE C. TORRES Officer
/s/ Edward D. Beach Director
- ----------------------------------- November 7,
EDWARD D. BEACH 1997
/s/ Delayne Dedrick Gold Director
- ----------------------------------- November 7,
DELAYNE DEDRICK GOLD 1997
/s/ Robert F. Gunia Director
- ----------------------------------- November 7,
ROBERT F. GUNIA 1997
/s/ Donald D. Lennox Director
- ----------------------------------- November 7,
DONALD D. LENNOX 1997
/s/ Douglas McCorkindale Director
- ----------------------------------- November 7,
DOUGLAS MCCORKINDALE 1997
/s/ Mendel A. Melzer Director
- ----------------------------------- November 7,
MENDEL A. MELZER 1997
/s/ Thomas T. Mooney Director
- ----------------------------------- November 7,
THOMAS T. MOONEY 1997
C-10
<PAGE>
/s/ Stephen P. Munn Director
- ------------------------------------ November 7,
STEPHEN P. MUNN 1997
/s/ Richard A. Redeker President and
- ------------------------------------ Director November 7,
RICHARD A. REDEKER 1997
/s/ Robin B. Smith Director
- ------------------------------------ November 7,
ROBIN B. SMITH 1997
/s/ Louis A. Weil, III Director
- ------------------------------------ November 7,
LOUIS A. WEIL, III 1997
Director
- ------------------------------------
CLAY T. WHITEHEAD
C-11
<PAGE>
EXHIBIT INDEX
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 (File No. 33-61997) filed via EDGAR on
February 14, 1996.
(b) Articles Supplementary, incorporated by reference to Exhibit No. 1(b)
to Post-Effective Amendment No. 4 to the Registration Statement on Form N-
1A (File No. 33-61997) filed via EDGAR on December 6, 1996.
(c) Amendment of Articles of Incorporation, incorporated by reference to
Exhibit No. 1(c) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 33-61997) filed via EDGAR on December 6,
1996.
(d) Articles Supplementary, incorporated by reference to Exhibit 1(d) to
the Registration Statement on Form N-14 (File No. 333-38087) filed via
EDGAR on October 17, 1997.
2. By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-61997) filed on August 22, 1995.
3. Not Applicable.
4. Instruments defining rights of shareholders, incorporated by reference to
Exhibit 4 to the Registration Statement on Form N-1A (File No. 33-61997)
filed on August 22, 1995.
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc., incorporated by reference to Exhibit 5(a) to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 33-61997) filed via EDGAR on February 14, 1996.
(b)Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and Jennison Associates Capital Corp., incorporated by reference to Exhibit
5(b) to the Registration Statement on Form N-1A (File No. 33-61997) filed
via EDGAR on February 14, 1996.
6. (a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated, incorporated by reference to Exhibit 6(a) to the
Registration Statement on Form N-14 (File No. 333-38087) filed via EDGAR
on October 17, 1997.
(b) Form of Selected Dealer Agreement, incorporated by reference to Exhibit
6(b) to the Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-61997) filed via EDGAR on September 19, 1995.
(c) Form of Management Agreement between the Registrant and Prudential
Investments Fund Management LLC with respect to Prudential Jennison Active
Balanced Fund.*
(d) Form of Subadvisory Agreement between the Registrant and Jennison
Associates Capital Corp. with respect to Prudential Jennison Active
Balanced Fund.*
(e) Form of Subadvisory Agreement between the Registrant and The Prudential
Investment Corporation with respect to Prudential Jennison Active Balanced
Fund.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company, incorporated by reference to Exhibit 9 to the Registration
Statement on Form N-14 (File No. 333-6755) filed via EDGAR on June 25,
1996.
<PAGE>
9. 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 (File No. 333-
6755) filed via EDGAR on June 25, 1996.
10. Opinion of Shereff, Friedman, Hoffman & Goodman, LLP., incorporated by
reference to Exhibit 10 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
September 19, 1995.
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Purchase Agreement, incorporated by reference to Exhibit 13 to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 33-61997) filed via EDGAR on February 14, 1996.
14. Not Applicable.
15. (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 (File No. 33-61997) filed via EDGAR on
February 14, 1996.
(b) Distribution and Service Plan for Class B Shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No.1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
February 14, 1996.
(c) Distribution and Service Plan for Class C Shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No.1 to the
Registration Statement on Form N-1A (File No. 33-61997) filed via EDGAR on
February 14, 1996.
16. (a) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth Fund, incorporated by reference to Exhibit 16 to Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A (File
No. 33-61997) filed via EDGAR on April 15, 1996.
(b) Schedule of Computation of Performance Quotations for Prudential
Jennison Growth & Income Fund, incorporated by reference to Exhibit 16(b)
to Post-Effective Amendment No. 5 to the Registration Statement on Form N-
1A (File No. 33-61997) filed via EDGAR on April 30, 1997.
17. Financial Data Schedules filed as Exhibit 27 to Post-Effective Amendment
No. 5 to the Registration Statement on Form N-1A (File No. 33-61997) filed
via EDGAR on April 30, 1997.
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to Post-Effective
No. 2 to the Registration Statement on Form N-1A (File No. 33-61997) filed
via EDGAR on April 15, 1996.
- -------------------------------------------------------------------------------
* Filed herewith
<PAGE>
EXHIBIT 99.B6(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.B6(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
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EXHIBIT 99.B6(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;
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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
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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
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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.
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(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.
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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
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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.
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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
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EXHIBIT 99.(b)(11)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post Effective Amendment No. 6 to Registration
Statement No. 33-61997 of Prudential Jennison Series Fund, Inc. of our report
for Prudential Jennison Growth Fund, dated November 4, 1996 and to the reference
to us under the heading "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants", both 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 Prudential Active
Balanced Fund appearing in the Prospectus, which is also included in such
Registration Statement.
Deloitte & Touche LLP
New York, New York
November 6, 1997
